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Robust job growth may spur Fed to quicker withdrawal of stimulus

Robust hiring in June may put the Federal Reserve on a faster-than-expected timetable to wind down its massive efforts to stimulate the economy.

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Wall Street analysts are now expecting the central bank to speed up its timetable to begin withdrawing its $85 billion in monthly bond purchases, from the end of the year to as early as September.

Stephen Stanley of Pierpont Securities said the latest data "puts the nail in the coffin" for the Fed to taper its quantitative easing in the fall, barring any sharp cuts in job creation in the next month. 

Stanley said he has noticed a recent change in the Fed's tone that has spurred more chatter about a faster tapering process, even though the economic data has not changed dramatically. 

"What we've seen from the Fed is that they've started to realize that QE was really not doing much good for the economy and was creating a lot of risks in the financial markets," he told Bloomberg radio on Friday. 

Still, he argued that there were significant gains in the job market recently — the 195,000 jobs created in June were about 30,000 better than expected.

Plus, there were 70,000 more jobs added in April and May.

Andrew Busch, editor of the political and financial newsletter The Busch Update, said market consensus is that the Fed will start tapering in September. 

He said the momentum for an early wind down began at the beginning of the year, when several Fed members remarked that they were becoming uncomfortable with the growing size of the central bank's balance sheet, which now tops $3 trillion. 

In addition, the economy has added an average of 202,000 jobs a month for the past six months.

That’s about 50,000 ahead of expectations and up from 180,000 through the end of last year, lending more confidence in a scaling back of the current monetary policy. 

But Dan Alpert, managing partner of New York investment bank Westwood Capital, cautioned that the job market is a long way from those Fed benchmarks and there may not be enough evidence for a pull back. 

He noted the unemployment rate is stuck in place, and other parts of the job report were not encouraging. 

Fed Chairman Ben Bernanke said recently that the bond-buying program would wrap up when the unemployment rate dropped near 7 percent, which is expected to happen about this time next year. 

The jobless rate in May remained at 7.6 percent, well above that threshold. 

Bernanke has emphasized that the timing of the retreat depends on the health of the economy and the labor market. 

Mark Zandi, chief economist with Moody's Analytics, said the labor market's improvement falls in line with estimates by the Fed that the central bank can turn off the purchases by this time next year, when the rate should hit 7 percent. 

"Given the job market's recent resilience, it does augur well for an even better job market next year when the fiscal headwinds begin to fade," he said.

How the Fed proceeds is the next big question. The central bank could choose to take smaller steps to cull the purchases — maybe pulling back about $10 billion a month. 

Busch suggested that the Fed may opt to cut the stimulus in half but acknowledged that it could be smaller. 

But he added that the key is to get the market to understand that a slow down is not a significant change in monetary policy and is a normalization of interest rates, which remain near 0 percent. 

The Fed is set to release on Wednesday the minutes from its latest meeting, which may provide more clues into the central bank's plans to exit from its unprecedented economic stimulus in the coming months. 

The stock market reacted positively to the data even though Busch and Stanley highlighted possible concerns over rising short-term interest rates. 

If the central bank acts in September, it would probably try to quell any market fears by reiterating that it will take several more years to unwind the rest of its stimulus effort, and will wait until the jobless rate hits 6.5 percent, most likely in 2015. 

But Busch said that the stock markets are nervous and "are not going to sit around and wait another month" to figure out the plan and that could push 10-year Treasury notes above 3 percent. They could "get there quickly," he said. 

They sat at 2.7 percent on Friday. 

Stanley did not expect that any rate within that range would significantly hurt the economy but it could push up mortgage rates, which have been rising from historic lows.