WASHINGTON — Pressure built Friday on the Federal Reserve to signal whether it’s ready to begin scaling back its controversial economic stimulus efforts, after a status quo May jobs report from the government sparked an unusual Wall Street rally.
Non-farm payrolls rose by 175,000 in May, the Labor Department reported, while the unemployment rate inched up to 7.6 percent because more potential workers returned to the labor force to look for jobs. On the face of it, that was no reason for stocks to soar.
But investors had feared a better report, and they rallied on the status quo.
They worry that the Fed soon will start undoing its controversial purchases of government and mortgage bonds, which have boosted the stock market. The purchases are part of an effort called quantitative easing, now in its third incarnation and dubbed QE3, in which the Fed buys $85 billion a month worth of bonds, driving down their return to investors.
Because these bonds pay so little, investors are forced into riskier bets with high returns. The Fed’s effort has boosted stocks at the expense of many bond investors or those who keep money in certificates of deposit. Financial markets took Friday’s report to mean that the Fed won’t start tapering off its support for the economy until late this year.
“It doesn’t change the outlook for jobs or the Fed taper of QE3,” said Scott Anderson, the chief economist for San Francisco-based Bank of the West. “You can read into this month’s payroll report just about anything you like. Bulls and bears will both find something to support their case. The truth is somewhere in between.”
The bulls carried Wall Street on Friday. The Dow Jones industrial average shot up more than 150 points within the first hour of trading and finished up 207.50 points at 15,248.12. The S&P 500 closed in the black, rising 20.82 points to 1,643.38. The tech-heavy Nasdaq ended up 45.17 points to 3,469.22.
In coming days, however, there will be great investor attention to hints in the speeches of Fed governors ahead of the June 18-19 meeting of the rate-setting Open Market Committee.
“The Fed is unlikely to taper off the pace of bond purchases based on today’s number,” Nariman Behravesh, the chief economist for forecaster IHS Global Insight, wrote in a note Friday to investors. “It would likely take a steady stream of payroll increases of around 175,000 (or more) and declines in the unemployment rate before the Fed can declare victory.”
Because of the across-the-board federal spending cuts called the sequester, hiring is likely to remain in the 150,000- to 175,000-a-month range, Behravesh and other economists said, making it likely that the Fed won’t change its support for the economy until near the end of the year. The spending reductions, particularly on defense programs, are blamed for sluggish economic growth over the past two quarters and for restraining stronger hiring.
“I don’t expect job growth to meaningfully pick up until the fiscal head winds stop blowing as hard. And that won’t happen until late this year,” said Mark Zandi, the chief economist for forecaster Moody’s Analytics. “But assuming Congress and the administration pass legislation raising the debt limit and funding government next year in a reasonably graceful way, then the job market should swing into higher gear next year.”
