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Solid jobs report to keep Fed tightening plans on track

A better-than-predicted U.S. jobs report for July keeps the Federal Reserve on track to begin unwinding its $4.5 trillion balance sheet in the fall and an additional rate hike by December, analysts said.

Nonfarm payroll employment increased by 209,000 in July, almost 30,000 more than expected, while the unemployment rate decreased to 4.3% from 4.4% in June. The euro fell more than 1% against the dollar by 12:26 p.m. Eastern Time after the report and the yield on 10-year U.S. Treasury bonds jumped 4 basis points to 2.26%, as traders bet on higher U.S. interest rates.

"It's indicative of firms remaining confident to take on more workers, and that in turn should help keep consumer spending growth solid," said Paul Ferley, assistant chief economist at RBC. "I think it's the kind of environment that the Fed will continue to conclude that the extended earlier stimulus may be no longer needed and reason to start pulling back on some of that stimulus."

The Fed has said it will soon start running down some of the huge stock of Treasury bonds it accumulated during years of quantitative easing, and it is expected to raise rates for a third time in 2017 by the end of the year.

"It actually cements the idea that they absolutely begin to unwind the balance sheet in the fall," said Scott Colbert, chief economist at Commerce Bank when asked about the payrolls data. "That would allow them and afford them the opportunity to reverse their quantitative easing."

Knocking the central bank off course would require an unexpected turn of events, according to Ken Matheny, senior economist at Macroeconomic Advisers.

"Unless this were a huge, negative surprise, there's very little chance that the Fed would hold off on its plans to begin shrinking the balance sheet," said Matheny. "I think today's report doesn't really change the outlook for rate hikes, either the gradual program ... or the timing of the next rate hike."

Matheny added that remaining economic indicator reports scheduled before the Fed's September meeting — including inflation and gross domestic product data — could still affect the timing of the Fed's rate hike announcement.

"Those reports could influence whether or not the Fed hikes in September or waits until basically the end of the year," he said.