Bullish US June jobs report prompts economists to eye earlier rate hike

By Michael Flaherty

WASHINGTON, July 3 (Reuters) - A bullish U.S. jobs report prompted several economists to toy with the idea of bringing forward their forecasts for a Federal Reserve interest rate hike, although most held firm, preferring to wait for more data.

Interest rate futures showed traders ramping up bets slightly that the U.S. central bank will lift rates in June of next year. The probability of a June rate hike implied by rate futures rose to 58 percent from 51 percent before the data.

The Fed has signaled that slack in the labor market and wage pressures remain key gauges of when policymakers would feel comfortable raising rates from near zero, where they have been since 2008.

Still, Thursday's jobs report was stronger than the market anticipated, and economists followed the news with notes that braced clients for the possibility of an earlier Fed lift off.

Nonfarm payrolls increased by 288,000 last month and the unemployment rate fell to 6.1 percent, its lowest level since September 2008, the Labor Department said.

The data also showed a decline in the number of Americans who have been out of work for at least 27 weeks, which at 3.1 million was the smallest pool since February 2009.

The numbers prompted J.P. Morgan's chief U.S. economist, Michael Feroli, to bring forward his forecast for a Fed tightening. It was the first time J.P. Morgan made such a call "in recent memory," Feroli said in the report.

J.P. Morgan now sees the Fed's rate lift off in the third quarter of 2015, up from the fourth quarter. Feroli added that given the jobs and inflation data, a second quarter tightening next year is "plausible."

Barclays (LSE: BARC.L - news) , which predicts the Fed's first hike in June of next year, said the report is unlikely to have much effect on the Fed's policy in the near term. But the bank noted that the Fed could move sooner if the unemployment rate continues to fall faster than the Fed expects, and core inflation moves above the central bank's target.

HSBC stuck with its call for a rate increase in the third quarter of 2015.

Goldman Sachs (NYSE: GS-PB - news) said the June report shows the possibility of an earlier hike than the bank's first quarter of 2016 call.

Key to the lift off equation is the long-term unemployed and wage pressure. Fed Chair Janet Yellen has repeatedly said slack remains in the labor market, and that as the economy recovers, the long-term unemployed will return to the workforce. That puts downward pressure on wages, at a time when inflation is below the Fed's 2 percent target. Yellen's view is opposed by both prominent economists and Fed officials.

"Still-low wage growth and the lack of a rebound in labor force participation will keep the core dovish FOMC members easy," Ethan Harris, co-head of Global Economics Research at Bank of America (Other OTC: BACYL - news) , said on Thursday.

Harris added, however, that "there is now an increased risk of an earlier first rate hike, though Fed officials are not prone to changing their outlook dramatically on one report alone." (Editing by Chizu Nomiyama)