An American jobs boom has ignited speculation that key interest rates -- once thought to be frozen at a 46-year low until next year -- may rise within months.
Stunning markets, the Labor Department announced on Friday that employers had added a four-year record of 308,000 new workers in March.
The news was a boon for job seekers, and a relief to the administration of US President George W. Bush, who has been clobbered over his jobs record by Democratic hopeful John Kerry ahead of Nov. 2 elections.
But bond prices slumped as markets immediately priced in a rise in rates, which would erode their value.
The persistently weak employment market had been the biggest obstacle lying between Federal Reserve chairman Alan Greenspan and an economy-cooling rise in key rates.
The federal funds target rate has been stuck for 10 months at a 46-year low of 1.00 percent, after being cut 13 times since January 2001 to counteract the bursting of the Internet bubble, Sept. 11 attacks, corporate scandals and the US-led Afghan and Iraq wars.
"If we can grow payrolls by 175,000 per month in April and May, there is a good chance that the Fed will ratchet the federal funds up from 1.00 to 1.25 percent at the June 30 meeting," said Moody's Investors Service chief US economist John Lonski.
Debt market investors clearly agreed that a rate rise had been brought forward, pushing the futures contract for the federal funds rate in September to 1.26 percent.
"There is a chance we could see the first rate hike this summer," said Naroff Economic Advisors president Joel Naroff, opening the possibility of an increase in rates in the August meeting of the Federal Open Market Committee.
But Lehman Brothers chief US economist Ethan Harris said huge jobs gains were required before Greenspan could act.
The economy would have to create 3.9 million jobs to return to full employment, taking into account past losses and growth in the workforce, Harris said.
"The Fed will contemplate tightening only if the cumulative shortfall in jobs is closing rapidly. Currently that shortfall is substantial," the economist said.
Wells Fargo Banks chief economist Sung Won Sohn agreed that the Federal Reserve would refuse to raise rates until it had evidence of "sustained and significant" jobs growth, and core inflation rebounding to between one and two percent.
"Both of these conditions have to be met before the Fed can even think about hiking interest rates," Sohn said.
"They will wait until after the election before pulling the trigger."
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