The July jobs report was likely viewed with some relief at the Federal Reserve in the sense that officials don’t have to rush forward with more monetary stimulus measures, economists said Friday.
The U.S. economy regained 1.76 million jobs last month and the official unemployment rate fell for the third month in a row to 10.2% from 11.1%, but the pace of the labor market recovery is slowing.
Rest assured though that more stimulus will come from the central bank if and when the economy stalls again.
The Fed “is standing on the front of their feet” ready to do whatever is necessary to provide support for the economy, said Nathan Sheets, chief economist at PGIM Fixed Income.
“They haven’t come this far to let these hard-won gains be reversed without a fight,” Sheets added.
What form will any further monetary stimulus take? And when will it be enacted? That’s still open for debate – both inside and outside the Fed, analysts said.
The recession of 2020 is unlike any seen before. The damage is uneven, hitting poor neighborhoods and certain service industries hard while other areas are hardly touched.
Fed policy isn’t designed to help narrow industry sectors as monetary policy is expected to lift all boats by making borrowing easier.
Given these challenges, Matthew Luzzetti, chief US. economist at Deutsche Bank, said that he was struck by New York Fed President John William’s remark in mid-July that “necessity is the mother of invention,” meaning innovative ideas are likely under discussion.
Luzzetti said his research suggests that the Fed needs to expand its balance sheet by “an eye-popping” $5 to $12 trillion to provide the stimulus the economy will eventually need.
The Fed’s balance sheet has already ballooned close to $7 trillion as the Fed has bought U.S.Treasurys and mortgage backed securities.
There are also likely to be discussions on other policies besides quantitative easing or bond buying, Luzzetti said. These include pegging interest rates, giving banks subsidies to make loans, and using existing credit facilities that have been set up to buy corporate and municipal bonds and assist medium-sized businesses.
The Fed has already cut its policy interest rate to zero this year and is buying Treasurys and mortgage-backed securities to keep financial markets functioning during the economic crisis caused by the coronavirus pandemic.
Fed officials are being unusually blunt in pushing fiscal authorities to do more to help the economy, economists said. Any breakdown in the on-going talks in Washington on another financial aid package would damage the economy.
“The income support from the first CARES Act was really crucial in whatever rebound and recovery we’ve had so far,” said Jeremy Schwartz, vice president on the global strategy and economics team at Credit Suisse. “So you’d really be putting that in jeopardy if you don’t extend some kind of support, very soon.”
The next U.S. jobs report, released on Sept. 4, will impact what the Fed decides to do at its next policy meeting later that month.
Economists now think the Fed will hold off on any major new stimulus until next year perhaps.
For now as long as the economy is continuing to show some momentum, the Fed “is not inclined to use any of those bazooka policies, Schwartz said.
In September, if the economy continues to show it’s recovering, Luzzetti thinks the Fed will just strengthen its forward guidance about how long the central bank intends to hold interest rates at zero.
Stocks were lower on Friday after the jobs report with the Dow Jones Industrial Average DJIA, +0.17% down 50 points in mid-day trading.