Financial markets pushed back their expectations for an interest rate increase by the Federal Reserve (search) until after the November U.S. presidential election after another shockingly weak payrolls report Friday.

Wall Street economists who were predicting a move in official rates this summer started to rethink their calls, since a persistent dearth of new jobs will make it hard for the central bank to justify removing some of the support of low interest rates.

"There's excruciatingly slow improvement in the labor market," said Dana Johnson, head of research at Banc One Capital Markets (search).

"It was a very disappointing report. It clearly pushes the timing of a Fed tightening further into the future. We're now calling for a Fed tightening in the fourth quarter of 2004 instead of in August," Johnson said.

The much anticipated February payrolls report showed only 21,000 jobs were created across the giant U.S. economy, more than 100,000 below market expectations. Gains for January and December were revised down by a combined 23,000 as well.

Bond yields plunged, with the yield on the 10-year Treasury note seeing its biggest daily decline in at least three years, while stock indexes slumped.

For months, economists have been predicting a big jump in employment that will prove the U.S. economy is finally on a sure footing and set the scene for an eventual hike in rates.

For months, they have been wrong.

Now, the calendar is putting a crunch on those Wall Street economists who are still forecasting a hike in rates in June or August. By its June meeting, the Fed will only have seen three more jobs reports, and they would have to be uniformly strong to dispel growing worries about job creation.

The concern is that if the labor market doesn't show solid growth, the recent burst in economic activity could falter, as it did in 2002.

"The Fed isn't going to change monetary policy till they've seen several months of substantial jobs growth," said David Resler, chief economist at Nomura Securities (search). He doesn't expect any change in policy before December or January.

Many economists believe the central bank would be reluctant to hike rates too close to the November presidential election, making its September meeting an unlikely venue for the first rate rise since May 2000.

In futures markets, which provide a good guide to the market's thinking on rates, the chances of a hike in September dropped to around 40 percent from about 90 percent at Thursday's close. For August, the chances dropped to about 30 percent on Friday from nearly 70 percent.

The federal funds rate stands at 1.0 percent, its lowest level since 1958.