WASHINGTON (Reuters) — Solid growth in the number of U.S. jobs last month greatly boosts the case for a December interest rate hike by the Federal Reserve, where policymakers have begun to worry the economy might eventually overheat without higher borrowing costs.
Employers outside of farming added 271,000 jobs in October and the jobless rate fell to five per cent, a 7-1/2-year low, according to a Labor Department report released on Friday.
With Fed officials already saying they don't want or expect the jobless rate to fall much further, it would likely take a devastating blow in the November hiring data or mayhem in financial markets for the majority of policymakers to give up on their expectation of a hike at their Dec. 15-16 policy meeting.
"The natural expectation is for the pace of job growth to slow in the months and quarters ahead. We are expecting that to happen," St. Louis Federal Reserve Bank President James Bullard told Reuters ahead of the report on Thursday. "I don't think markets have absorbed this."
On Friday, investors raised bets the Fed would lift rates next month, with futures markets implying a 72 per cent chance of liftoff, up from 58 per cent a day earlier.
Prior to Friday's jobs report, private economists said job gains above 150,000 in October and November could be enough for the central bank to hike in December.
October's job growth was well above average compared to the last two years and also much higher than what many U.S. central bankers say is needed to reduce unemployment.
A range of research at the central bank suggests that even monthly job growth around 100,000 could be enough for policymakers to move ahead with a rate hike if other signals on the economy's health don't flash warning signs.
Last month, Atlanta Fed President Dennis Lockhart said more than 100,000 new jobs a month was enough to outpace population growth and lower joblessness.
Bullard on Thursday pinned the number between 100,000 and 125,000, while Cleveland Fed President Loretta Mester has said it's between 70,000 and 120,000.
These numbers are considerably lower than was normal in past decades because the U.S. population is becoming increasingly elderly. America saw a bulge in births just after World War Two and that generation is now retiring in droves, slowing growth in the workforce.
The 2007-09 recession put millions of workers out of work and it has taken around 200,000 new jobs a month since 2010 to knock a 10 per cent jobless rate in half.
On Wednesday, Fed Chair Janet Yellen described the economy as strong, despite the slower job growth seen in August and September. The poor payrolls growth seen in those months had fueled doubts among investors that the Fed would raise rates this year, even though Yellen has signaled she believed a hike would be appropriate before the year ends.
Central bankers have been saying job creation needs to slow. Already, the median view among Fed policymakers is that an unemployment rate below 4.9 per cent would eventually send inflation above their two per cent target.
"It's not only expected that we are seeing some slowdown," San Francisco Fed President John Williams told reporters in October. "It's consistent, I think, with my overall view" on what is needed for a healthy labor market.