The Federal Reserve looks increasingly likely to start tapering its massive bond-buying program after economic data point to an improving job market, the central bank's top priority, economists said.
A slew of economic data Thursday showed slow but steady gains in employment a day before the Labor Department releases its highly anticipated August jobs report.
The Fed has made clear that any tapering of the bond-buying program would depend on continued broad improvement in the economy, particularly in unemployment which still remains stubbornly high four years after the Great Recession ended.
"Overall, the US labor market is improving and the pace is decent enough for the Fed to announce tapering at the September 17-18 meeting," said Jennifer Lee of BMO Capital Markets.
The wind-down of the Fed's $85 billion a month bond-buying program was expected to dominate the economic agenda of the Group of 20 summit that was getting under way in St. Petersburg, Russia.
Recent data has highlighted continued growth in the world's largest economy, which hit an annual rate of 2.5 percent in the second quarter.
According to the Fed's Beige Book report released Wednesday, growth was "modest to moderate" with employment steady or improved.
On Thursday, payrolls firm ADP reported private-sector job growth slowed in August but remained in line with the monthly average over the last 12 months.
Mark Zandi, chief economist of Moody's Analytics which helps produce the ADP report, said "it is steady as she goes in the job market."
"There is little evidence that fiscal austerity and health care reform have had a significant impact on the job market," he said.
Weekly unemployment claims, a sign of the pace of layoffs, continued to trend downward last week at the lowest level in nearly six years.
"Claims continue to support the recent pace of employment growth, and the downward trend in unemployment," said Jay Morelock, an economist at FTN Financial.
"If tomorrow's payroll report shows further improvement in the US labor market, expect the Fed to lean on this data as they head into their September meeting, increasing the likelihood tapering will begin in September," Morelock said.
The services sector, which accounts for most of US economic activity, picked up pace in August, with businesses reporting improving orders and increased hiring, the Institute for Supply Management said Thursday.
The ISM's purchasing managers index for the non-manufacturing sector rose 2.6 points to a record 58.6, the highest level since the index was launched in January 2008.
"The majority of respondents' comments continue to be mostly positive about business conditions and the direction of the overall economy," the ISM said.
Talk of the Fed taper since the plan emerged in May has impacted global financial markets, pushing US interest rates higher and sending capital away from emerging markets.
On Wall Street, long-term yields on US Treasurys jumped as investors sold the bonds in anticipation of a positive jobs report.
The yield on the 10-year Treasury bond surged to 2.98 percent in afternoon trade from 2.90 percent Wednesday, while the 30-year yield hit 3.88 percent compared with 3.80 percent.
"A jump in bond yields following some favorable employment reports and a record-high growth rate in services sector activity is suggesting the Street may be expecting the Federal Reserve to taper its asset purchases later this month," Charles Schwab & Co. said in a market note.
The Labor Department's August jobs report Friday is the most crucial data for the Fed in the next two weeks ahead of the Federal Open Market Committee monetary policy meeting.
Analysts expect the Labor Department will report the unemployment rate at a four-year low of 7.4 percent last month, unchanged from July's figure.
Jobs growth was projected to increase modestly, to 177,000 jobs, up from a weak 161,000 in July.
"We are becoming more convinced by the day that the jobs numbers are set for a significant shift to the upside. That probably won't happen in tomorrow's August report, but it is coming," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.