Handicapping the Fed’s Next Move

What does the jobs report mean for the Federal Reserve? We don’t really know.

And that makes it exactly the kind of question that financial analysts love to discuss. In a moment, some excerpts from the morning mail.

The Fed has tied its economic stimulus campaign to the unemployment rate. It has said that it will begin to taper and then retreat from its efforts as the rate falls below a series of thresholds, and that it hopes to begin the process later this year.

The unemployment rate, which fell to 7.4 percent in July, is rapidly approaching the first of those thresholds. The Fed’s chairman, Ben S. Bernanke, said in June that the Fed wanted to end its current round of bond buying around the time the rate hits 7 percent, which he predicted would happen by the middle of next year. That prediction is looking conservative, suggesting the Fed could start tapering when its policy-making committee meets in September.

But Fed officials have cautioned that they want unemployment to fall because people are finding jobs, not because they’re leaving the labor force. And by broader measures, the job market remains weak. Growth is sluggish - just a 1.4 percent annualized pace in the first half of the year - and the share of American adults with jobs has actually fallen since the recession ended.

So the decision is unlikely to be clear-cut, particularly because Fed officials are divided about the benefits and the costs of the bond-buying campaign.

And the decision is not going to be made this week. Officials will see six more weeks of economic data, including one more jobs report.

But enough with facts. Here are some predictions:

Martin Schwerdtfeger, TD Economics: “This weaker-than-expected reading and the negative revisions to the previous two months will demand more of an improvement in the upcoming data releases to cement the expectation that the Federal Reserve could begin to reduce its monthly asset purchases in September. A repeat of July’s performance in August’s payrolls would cast some doubts over the notion that economic momentum is decisively accelerating.”

Ted Wieseman, Morgan Stanley: “This outcome may raise a bit of doubt about the likelihood of QE tapering starting in September, but we don’t see it as meaningfully changing the Fed outlook with increasing signs of a turn higher in the overall economy moving into the second half and mostly positive indications for continued solid labor market improvement, even if they didn’t show up so much in this report.”

Gus Faucher, PNC: “The August employment data will be key to the Fed’s decision as to whether to start reducing its purchases of long-term assets at its mid-September meeting. If job growth picks back up again and the unemployment rate holds steady at 7.4 percent then the Fed is likely to reduce its purchases somewhat. Another month of disappointing job growth and an increase in the unemployment rate could lead the F.O.M.C. to maintain its $85 billion of monthly purchases in the near term.”

Peter Newland, Barclays: “For policy makers, this probably marks a release that rules nothing in or out. The August employment report, and the data flow between now and then, will likely prove decisive for the policy outlook.”

Ian Shepherdson, Pantheon Macroeconomics: “The Fed is on track to hit its 7.2-to-7.3 percent Q4 unemployment rate target, and that probably matters more to F.O.M.C. members - especially the hawks and near-hawks - than the tiny slowing in payroll growth. The softness of wages in July is disappointing after recent signs of improvement, but that’s a secondary concern. We expect a robust August employment report, and think September tapering is a 70/30 bet.”

Kevin Logan, HSBC: “The unemployment rate fell to 7.4 percent in July, taking another step closer to the 7.0 percent level that Fed Chairman Ben Bernanke has flagged as a guidepost for the end of the current QE program. This leaves the door open for the Fed to potentially announce a reduction in its $85 billion per month asset purchases in September. However, Wednesday’s G.D.P. report showed subpar growth in the first half of this year - averaging just 1.4 percent at an annual rate - well below the Fed’s 2013 G.D.P. projection of 2.5 percent. We continue to expect that the announcement of Fed tapering will be delayed until December, dependent on the evolution of the economic outlook over the next six weeks.”