Why These Job Numbers Matter to the Fed

Even though the Federal Reserve is poised to start shrinking its $4.5 trillion balance sheet, the outlook for continued rate increases is very much in doubt following the recent slowdown in inflation. That makes the monthly jobs report on Friday even more important than usual as investors and analysts try to figure out whether the central bank will continue to take its cues from labor market strength rather than inflation weakness as it charts a course for monetary policy.

The Fed set the stage for balance sheet reduction at the July meeting of the Federal Open Market Committee. The bar for starting in September is quite low, as the economic data between now and then will have little impact on that decision. More of an issue for the balance sheet plan is the pending battle over the U.S. government's borrowing limit, or debt ceiling. If that results in bond market turmoil, the Fed will delay its plans.