Top Wall Street dealers have once again pushed back when they expect official interest rates will rise, saying the slow pace of jobs growth is likely to stay the Federal Reserve's hand a while longer.

A Reuters poll of 22 primary dealers taken Friday after a disappointing employment report for May found only five dealers now expect a Fed rate increase in August, a sharp move from only a month ago, when 16 were looking for a rate increase in August.

Now, 10 dealers believe the central bank's first monetary tightening, lifting the 1.75 percent short-term rate from four-decade lows, will come in September.

A tepid labor market, scant signs of a revival in business spending and tumbling stock prices that could undermine consumer confidence and eat into investor wealth are raising questions about the pace of recovery.

Those weaknesses were in sharp relief on Friday. The stock market was soft after a rough week and the employment report showed a mediocre 41,000 new jobs were created in May. Most of the gains made in the previous month revised away.

"We need to see triple-digit payroll gains before the Fed begins to think about tightening," said Salomon Smith Barney economist Chris Weigand.

That could take some months. While inflation remains quiescent, there is no rush for the Federal Reserve to start raising rates. Wall Street has grown increasingly cautious about the strength of the U.S. recovery, which stormed ahead at a 5.6 percent annual rate in the first quarter but since has slowed.

COOLING EXPECTATIONS

Financial markets have already trimmed their expectations for Fed tightening.

Fed funds futures, which bet on the timing of Fed moves, put the odds of a quarter-point rate hike at the Aug. 13 policy meeting at about 40 percent after the May employment report, down from about 50/50 before the data.

By the end of the year, December Eurodollars are pricing in a funds rate of about 2.25 percent, compared with the current 1.75 percent, and the total amount of tightening has been scaled back in recent months.

The Federal Reserve has tempered those expectations. Fed Chairman Alan Greenspan said earlier this week that his outlook had not changed much since January, when the economy was just emerging from last year's recession.

A nominee to the Fed board, Donald Kohn, said Thursday that the U.S. economy was at or near the zone of price stability, backing recent comments by other Fed officials that suggest inflation is not on the list of the central bank's concerns at present.

"This is a whole new thought from them; it argues for a much more patient Fed," said JP Morgan senior U.S. economist James Glassman.

If inflation is expected stay low -- in the zone where it does not factor into buying decisions -- there is no pressing need for policy-makers to start hiking rates, especially while the recovery is on a tentative footing.

Activity has cooled from the robust pace of growth early in the year, and geopolitical uncertainties have weighed on investors' minds, pushing down stock prices and market interest rates.

Analysts believe the consequences of falling stock prices will also weigh on Fed thinking.

"They see a risk that all of that turmoil in the equity market may translate into softer consumer spending, which could potentially cause the recovery to stall," said Anthony Karyadakis, senior financial economist at Banc One Capital Markets.

At the back of everyone's minds is the risk of what another attack on the United States, after repeated warnings from government officials, could do to sentiment. Policy-makers were surprised by the resilience of the economy after the Sept. 11 attacks.

"A major risk in many dimensions would be another terrorist attack, and who knows whether the response to that would be larger and more long-lasting?" Fed nominee Kohn said.