Fed Rate Hike in June a Done Deal After Jobs Report

A stronger-than-expected May payrolls report on Friday sealed expectations the Federal Reserve (search) will raise rates by a quarter-percentage point later this month.

Still, the larger-than-expected jump of 248,000 payrolls in May, combined with sizeable upward revisions to March and April, was not enough to trigger speculation the Fed will move by a more aggressive half-percentage point.

"Clearly these numbers are strong enough to erase any doubt that there will be a tightening at the end of June," said FTN Financial (search) chief economist Chris Low.

The employment report for May was seen as the last major economnt tightening at that meeting.

After holding the official federal funds rate at 1.0 percent, the lowest level since 1958, since last June, the central bank has said it plans to start raising rates in a "measured" fashion now that the economy has gathered steam.

Economists pointed out that, with the latest revisions to recent history, employment gains have averaged 315,000 over the past three months and 238,000 since the start of the year — very healthy levels of job creation that have ended talk of the jobless recovery.

The Fed's ultra-low benchmark rate is now seen as out of step with solid economic growth, and rates are expected to be nudged up to 2.0 percent by the end of the year, according to futures market expectations.

Still, the unemployment rate failed to improve in May, remaining steady at 5.6 percent, as more workers resumed the search for work. That suggests the labor market can still absorb plenty of new entrants before wage and inflation pressures start to build, and the Fed will not need to move aggressively to head off inflation.

"There's really nothing you can say about this number that's weak. Regarding the Fed, those of us who were holding out will probably have change our view (to a) move in June," said Steve Ricchiutto, chief U.S. economist at ABN AMRO.

Prices for fed funds futures at the Chicago Board of Trade responded mildly after the job data was released.

July futures fully price a rate increase after the June 29-30 meeting of the Federal Open Market Committee (search) but show only a minimal chance of a 50 bps move.