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Prospects Grow for Earlier Fed Rate Hike as US Adds Jobs

A big pickup in job growth in May: the U.S. economy adding 280,000 jobs last month. But the unemployment rate also ticked higher to 5.5 percent as more Americans polished up their resumes to look for work.

While the better-than-expected job numbers bode well for the more than 8 million Americans still looking for work, it also paves the way for an interest rate hike by the Federal Reserve - sooner rather than later.

Job gains last month beat expectations by more than 50,000. And aside from losses in the energy sector – gains were across the board, said PNC Financial Services senior economist Gus Faucher on Skype.

“We had strong growth in retail trade and leisure, hospitality services, education and health care, business and professional services, construction, and then we also saw a pick-up in job growth in manufacturing,” said Faucher.

The pick-up in manufacturing is notable, given the recent weakness in exports – a byproduct of a stronger dollar which has made American-made goods more expensive abroad. The other notable development is a steady improvement in wages.

Ethan Harris, head of global economic research at Bank of America Merrill Lynch, said, “Normally workers start to get a little bit of bargaining power as they get a fully healthy job market. That’s been delayed because the recovery was so slow. But now we’re finally there. We’re finally seeing workers. We’re on the cusp.”

But a healthy labor market also puts the prospect of an interest rate hike this year back on the table. Some economists had urged the central bank to delay raising rates until next year after government reports showed the U.S. economy shrank in the first quarter.

Solid job growth in May could prompt the Fed to act sooner, said Washington bureau chief Mark Hamrick.

“Our own Bankrate quarterly economic survey finds that the vast majority of our panel members believe that the Fed will be raising interest rates in September,” he said.

Members of the Federal Reserve Open Market Committee could signal their intentions after the board’s next meeting later this month.

Faucher said Federal Reserve officials may now have the confidence to raise interest rates as early as September, though they will probably increase them slowly. He also said the tightening labor market is boosting wages, while falling energy costs are keeping money in consumer’s pocket books. Together, these things could increase the consumer spending that drives most U.S. economic activity.

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