NFP: July report puts the Fed closer to its threshold on progress, but not there yet – Wells Fargo

The July labor report came in above expectations. According to analysts at Wells Fargo, the recent pickup in momentum turns the volume up on the debate over when the labor market will meet the FOMC's criteria of “substantial further progress.” They think the Fed want to see further ground recovered and if constraints boil down to short-term frictions or longer-lasting damage before kicking off tapering.

Key Quotes: 

“The better-than-expected July report is certainly a step in the direction of “substantial further progress” that the Fed is looking for. Through July about 75% of the jobs lost during lockdowns last year have been added back, but there remain 5.7M fewer jobs compared to February 2020 (see chart). At the same time, labor force participation has barely budged since the economy's broad reopening this spring.”

“We continue to look for the factors currently constraining the labor supply to ease this fall, which should keep hiring strong. However, the rise of the Delta variant is likely to lead to a more muted rebound in labor force participation over the next few months than we had previously expected.”

“September may still be too soon to bring the clarity on the jobs market many are looking for. While additional progress is a good bet over the next month, we do not expect it will be enough for the bulk of the FOMC to get on board with tapering as early as its September 22 meeting even following today's report.”

“While this report certainly puts the Fed closer to the threshold of “substantial further progress,” key Fed officials are likely to see that some ground still needs to be recovered.”