Fed Likely to Raise Rates in Nov, Dec After Strong Jobs Data

NEW YORK – Economists and financial markets bet a pause in the Federal Reserve's (search) rate-hiking campaign was less likely after a robust U.S. jobs report Friday.

While analysts had already expected the Fed to lift official interest rates at its policy meeting next Wednesday, there had been a strong suspicion it would pause in December.

But a surge of 337,000 in October payrolls — double Wall Street's median expectation — and large upward revisions to August and September figures dampened speculation the U.S. central bank would take a break in its bid to restore the federal funds rate to a more neutral level.

"There is no need for the Fed to slow its tightening pace with job growth like this," said Chris Low, chief economist at FTN Financial.

The Fed has raised the benchmark federal funds rate (search) three times this year, starting from a super-low 1.0 percent. Another quarter percentage point move at its Nov. 10 policy meeting would take the rate to 2.0 percent.

Even at 2.0 percent, the federal funds rate would still be below inflation, a policy stance that traditionally still adds lots of stimulus to the economy.

Fed officials have said they want to get official rates back to more normal levels for a growing economy, and have put a "neutral" interest rate, one that neither boosts nor hinders growth, in the 3.0 percent to 5.0 percent range.

But some officials including Fed Vice Chairman Roger Ferguson have hinted at taking a pause, depending on the economic news, to assess how sustained high oil prices are affecting activity.

Some economists on Friday said the Fed's action in December would hinge on the November payrolls report, due out Dec. 3.

"This puts a December rate hike in play if we see this kind of job increase in November," said Anthony Chan, senior economist at J.P Morgan Fleming Asset Management.

The snapback in hiring and upwardly revised job gains in recent months helped allay fears about the lopsided expansion and risks to consumer spending from weak job growth.

"It very much confirms the presence of a full-fledged recovery for the labor market (and) bodes well for household purchasing power as the holiday shopping season rapidly approaches," said John Lonski, chief economist at Moody's Investors Service.

There are two complicating factors for a rate rise in December: the risk of playing Scrooge ahead of the holiday retail season, and reduced liquidity in financial markets towards the end of the year.

Deutsche Bank's senior U.S. economist, Cary Leahey, noted that Fed Chairman Alan Greenspan (search) has not raised rates in December in about 15 years.

"Still, the Fed meeting is early in the month so it may not distort year-end funding pressures," he said.

Futures have fully priced in another rate increase from the Fed Wednesday, and the likelihood of another increase in December, initially jumped to more than 80 percent after the payrolls report from around 50 percent, then eased to about a 76 percent chance by midmorning in New York.