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June’s employment report reinforced the belief that the U.S. economy was continuing to rebound at a strong pace as vaccines took hold and life began to return to normal. Nonfarm payrolls grew by 850,000 jobs during the month, the largest jump in 10 months. In addition, average hourly earnings rose by 3.6% on a year over year basis.
hile the jobs growth is good news, there remain signs that the reopening of the economy will not be an easy process. Skilled labor remains difficult to find in many industries. The just in time inventory and supply chains that have developed over the past years have shown serious signs of stress, especially in the semiconductor sector which in turn has limited the auto makers return to full schedules, causing widespread ripple effects throughout the economy. The Fed is also very aware that despite the job growth, there are still 6.7 million fewer jobs than existed at the beginning of the pandemic.
Responding to the stresses seen recently in the money markets, with Treasury bill and repo rates near zero and in some cases negative, the Federal Reserve (“Fed”) raised the rate it pays on its Reverse Repurchase Facility from 0.0% to 0.05%. It also raised the rate it pays to banks for excess reserves from 0.10% to 0.15%. These moves, termed “technical” by Chair Powell did set a new floor on many money market rates and yields on Treasury bills, repo and federal funds all moved slightly higher following the Fed’s actions.
The growth seen in the economy as well as the move higher in inflation have increased the pressure on the Fed to begin to detail how they plan to slow, and eventually end, their current purchases of Treasury and mortgage backed securities. While there is no guarantee, the Fed’s annual symposium in Jackson Hole at the end of August would seem to be a natural fit for Chair Powell to discuss their plans. His choice of words could well set the tone for both the fixed income and equity markets for the remainder of the year.
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