Unemployed person seeking a job. Reuters

June’s better-than-expected jobs report, coming exactly four years after the official end of the recession, increases the odds that the Federal Reserve will begin in the coming months to taper its $85 billion in monthly bond purchases aimed at stimulating the economy.

“It’s a very strong report, and it keeps the Fed’s plan on tapering at the end of the year in place,” Steve Blitz, chief economist for ITG, told the International Business Times.

“The economy really continues to show signs of improvements, and these extraordinary means of ease are no longer necessary,” Blitz added. “It doesn’t mean that the Fed should be tightening rates, but it just means that we don’t need to be expanding the Fed’s balance sheet anymore.”

The Labor Department’s June nonfarm payroll showed that employers created 195,000 jobs last month. The figure is stronger than analyst expectations of 165,000 new jobs, but there were also significant revisions to the last two months of data, which added another 70,000 jobs to the total. The number of new jobs created in May was revised up 195,000 from 175,000, and April’s increase was raised to 199,000 from 149,000.

The economy created an average of 196,000 jobs per month in the April-to-June period, down just slightly from the 207,000 pace in the first quarter. Over the past year, job gains have averaged 182,000 a month.

The unemployment rate held steady at 7.6 percent as jobs growth was once again more than matched by an increase in the number of people looking for jobs. The labor-force participation rate ticked up to 63.5 percent, from 63.4 percent in May and 63.3 percent in April. During the boom years, it was in the 66 percent range.

There was a modest 160,000 rise in the alternative household measure of employment and a 177,000 increase in the labor force. The 160,000 rise in household employment is very encouraging coming after a 319,000 gain the previous month.

Meanwhile, average-hourly earnings rose by an entire dime in the month to $24.01. Over the year, average hourly earnings have risen by 51 cents, or 2.2 percent. Strong hourly earnings means that people will have more money to spend. The average workweek for all employees was unchanged at 34.5 hours.

“The bottom line is that payrolls growth could probably even slow a bit from here and the Fed would still start to taper QE3 at the FOMC meeting scheduled for September, safe in the knowledge that payroll gains of 150,000 to 200,000 per month will eventually reduce the unemployment rate,” Paul Dales, senior U.S. economist at Capital Economics, said in a note to clients.

Fed’s Exit Strategy

Last month, Federal Reserve Chairman Ben Bernanke said the central bank could begin easing back stimulus efforts later this year if the job market continued to show signs of strength, with the $85 billion monthly bond-buying program wrapping up when unemployment sinks to 7 percent. Under the Fed’s current projections, that threshold is expected to be breached around mid-2014.

While there have been some mixed signals from the economic data, economists believe the economy and the labor market are slowly healing.

One big disappointment on the economy was the unusually large downward revision in first-quarter real gross domestic product growth -- from 2.4 percent to 1.8 percent. Most of the revision was due to sharply slower growth in consumer spending on services. But this was “old news.”

Consumer spending fundamentals are still quite positive, and the stage is set for sustained growth of 2 percent to 2.5 percent this year and next, according to HIS Global Insight. Auto sales are at a five-year high. Consumers are the most upbeat since early 2008, and consumer finances continue to improve.

Meanwhile, housing activity is sizzling. Home sales are at levels last seen before the recession began. House prices rose at a record monthly rate in April. Economists at HIS expect housing to remain a strong engine of growth through 2015.

The Fed appears eager to extricate itself from its asset-purchase program sooner rather than later. However, its exit strategy is a work in progress that will be determined by the economic data and the evolution of the Fed’s thinking on the costs of unwinding its ultra-loose monetary policies.

Dales of Capital Economics currently projects the exit strategy to include five broad stages, including the tapering of the monthly asset purchases this September, the end of QE3 completely next June, a well-telegraphed first rate hike in March 2015 and the sale of some the Fed’s holdings of Treasuries starting in 2017.

Dales also notes that a weaker economic recovery would force the Fed to push the exit timetable back, while a stronger one would prompt it to bring it forward. Either way, the Fed will move carefully and cautiously.

The Fed has developed a tendency to announce significant policy developments at meetings that are followed by a press conference, which allows the chairman to explain the committee’s actions in more detail. So when Bernanke said the Fed was likely to start tapering QE3 “later this year,” he probably had the meeting scheduled for September or December in mind.

“As long as the economic news doesn’t deteriorate, we think the first reduction in the pace of the monthly asset purchases will be announced in September,” IHS Global Insight's Chief Economist Nariman Behravesh and U.S. Economists Paul Edelstein and Gregory Daco wrote in a note to clients.

They added: “Similar thinking implies that the meeting in June 2014 is the one at which the Fed is most likely to end its asset purchases completely. That tallies with Bernanke’s “midyear” suggestion and both the Fed’s and our own forecast that by then the unemployment rate will have fallen close to 7 percent.”

According to IHS, such a schedule implies that the Fed will go from purchasing $85 billion of assets per month to buying no assets over the course of the seven FOMC meetings between September this year and June next year. Given that Bernanke said the Fed intends to reduce the pace of purchases in “measured steps,” it seems likely that the tapering will be spread out over these meetings in roughly equal steps.

This would mean that since the open-ended QE3 policy was first announced in September 2012, the Fed will have purchased $1,650 billion of assets, or the equivalent of 10.8 percent of U.S. GDP. That compares with the $1,725 billion (12.3 percent of GDP) of assets purchased during QE1 and the $600 billion (4.1 percent of GDP) bought during QE2.

If the Fed tapers QE3 in line with IHS’s expectations, the Fed’s balance sheet would stabilize at around $3,850 billion. That would be almost five times the $800 billion that was the norm before the financial crisis. It would also mean that, based on policies already announced, by the end of 2014 the Fed’s balance sheet would have increased by almost as much as the Bank of England’s and by much more than the Bank of Japan’s and the ECB’s.