The US Federal Reserve building is seen in Washington, DC. A stronger-than-forecast US payrolls report strengthens the argument for the Fed to begin raising interest rates in June, after the jobless rate reached the range that officials view as full employment.

Bloomberg
Washington
A stronger-than-forecast US payrolls report strengthens the argument for the Federal Reserve to begin raising interest rates in June, after the jobless rate reached the range that officials view as full employment.
The jobs report looks “unambiguously strong” said Neil Dutta, head of US economics at Renaissance Macro Research. “June is still the base case” for rates to rise, he said. “The probability of September is falling rapidly.”
With the world’s largest economy gaining momentum, “June would strike me as the leading candidate for liftoff,” Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said on Friday. “It is clear we need higher real interest rates,” Lacker, who is a voting member of the Federal Open Market Committee this year, said in an interview on Sirius XM radio.
Fed Chair Janet Yellen last week began to prepare investors for an increase this year, without saying that a move was imminent. She signalled in testimony to Congress that the FOMC may drop its pledge to be “patient,” which would mean that rates could be raised at any meeting.
“It now seems to be a done deal that the ‘patient’ guidance will be dropped from the March FOMC statement,” Harm Bandholz, chief US economist at UniCredit Group in New York, wrote in a report. Aneta Markowska, chief US economist at Societe Generale in New York, echoed that sentiment.
“It virtually cements the removal of the ‘patient’ language at the March meeting,” said Markowska. “It keeps the June rate hike in play.”
Unemployment fell to 5.5% in February, the lowest level in almost seven years, the Labor Department said Friday. Fed policy makers estimate full employment at 5.2% to 5.5%, according to their latest economic estimates released in December.
US stocks retreated, with the Standard & Poor’s 500 Index heading headed for its steepest slide since January 5, as the report fuelled speculation the Fed is moving closer to raising rates. San Francisco Fed President John Williams, who also votes on policy this year, said in a speech Thursday that mid-year may be time for a “serious discussion” about raising rates.
“The time is coming when we’ll be making our first steps down the road to normalisation,” Williams said in Honolulu. He said the improving labour market will lift wages and inflation, which means the Fed should raise rates before achieving its policy goals of full employment and stable prices.
The Fed defines price stability as 2% inflation, measured by the personal consumption expenditures price index. This gauge rose by 0.2% in January compared with a year ago and has not been above 2% since March 2012.
Yellen will hold a press conference and policy makers will update their quarterly economic projections at their next meeting on March 17-18. The FOMC last raised the federal funds rate in June 2006, and has held the target range near zero since December 2008.
Fed Vice Chairman Stanley Fischer said last month the central bank appears most likely to raise rates in June or September, although economic developments might warrant different timing for liftoff.
Even as employment grows, tepid wage growth and low inflation will be the main considerations for the Fed, said Jonathan Wright, a professor at Johns Hopkins University in Baltimore and a former economist at the Fed’s Division of Monetary Affairs.
“The timing of liftoff and the pace of tightening thereafter have much more to do with inflation than the labour market,” he said. “I don’t think that the expected path of policy has changed materially.” Average hourly earnings rose 0.1% in February from the prior month after rising 0.5% in January, which was the most since November 2008, according to Friday’s report.
Some policy makers are questioning whether full employment is less than the 5.2% to 5.5% jobless rate the Fed currently defines as the lowest that can be achieved without heating up inflation. Chicago Fed economists say this sweet spot, also called the natural rate of unemployment, may be as low as 5%.
Chicago Fed President Charles Evans has lowered his estimates for the normal rate. “I now think that it might be something more like 5.0%,” Evans said in a speech Wednesday. “A few” members of the policy-making Federal Open Market Committee lowered their estimates in light of “continued softness” in inflation, according to minutes of the January 27-28 meeting, which didn’t identify the officials.