A strong June jobs report could add fuel to a growing debate over the timing and trajectory of interest rate hikes.

Analysts are forecasting that the economy generated an estimated 200,000 jobs last month, and if the prediction holds, it will be the third consecutive month that the U.S. has added 200,000 or more new workers. The average number of jobs created each month during the past year now stands at 197,000, a sign of growing labor market stability following several years of fits and starts in the wake of the 2008 financial crisis.

The headline unemployment rate for June is expected to hold steady at 6.3%, its lowest level in five years.

The U.S. Department of Labor will release its monthly jobs report at 8:30 a.m. on Thursday, a day ahead of its normal release time because of the July Fourth holiday.

If the numbers come in close to the predictions pressure could begin to build on the Federal Reserve to move up its timetable for raising the key fed funds rate – the short-term rate banks charge one aother – from the near-zero range where it’s been held for five-and-a-half years.

While much of the recent economic data released has been decidedly mixed – notably the 2.9% contraction in first-quarter GDP – the U.S. labor market has shown signs of gradual resilience and momentum. Job growth has been consistent and the unemployment rate is falling.

“Our models tell us to expect another positive report with roughly 200,000 net new payroll jobs. Investors will be particularly interested, however, in the unemployment rate and the pace of wage gains,” said David Kelly, chief global strategist at JPMorgan Funds.

The unemployment rate and wage gains are significant because they both contribute to inflation, probably the key indicator right now for use by the Fed as it determine when and how to raise interest rates.

As the economy strengthens the unemployment rate will fall and wages should start moving higher as demand for workers increases. Higher wages will eventually push prices higher, causing inflation.

Wages have been disturbingly stagnant in recent months despite the strengthening labor market, but inflation has started to creep higher anyway, especially in areas that impact consumers such as food and energy.

Balancing Inflation

Gus Faucher, senior economist at PNC Financial Services Group, said the weak wage growth suggests “there’s more slack in the labor market than the unemployment rate would indicate.” Although, if the economy continues to add jobs at its current rate or better, he expects wages to start rising in the second half of 2014 and into next year. 

That would give inflation a boost, something the Fed is currently seeking, Faucher noted.

Inflation has been running at about half the Fed’s target rate of 2%, which had raised concerns of deflation earlier this year when labor markets briefly stalled. That situation seems to have corrected itself, and the concern now is creating a balance between inflation that signals strong economic growth and harmful runaway inflation.

The general consensus among economists – including those employed at the Fed – is that interest rates will likely start to move higher in mid-2015. The question then becomes how quickly does the Fed move rates higher, in other words: how steep is the trajectory for raising rates?

Inflation hawks at the central bank, or those who believe that years of stimulus and easy-money could lead to uncontrollable price surges, are itching to make borrowing more expensive by raising rates earlier than currently forecast in order to stave off inflation and prevent the economy from becoming overheated.

Philadelphia Federal Reserve President Charles Plosser told FOX Business last week that if the economy continues to gain momentum and inflation moves higher it could prompt the central bank to raise interest rates sooner than forecast.

Plosser, a long-time inflation hawk, said the Fed’s current forward guidance, which it uses to forecast future policy decisions, may be “too passive,” meaning policy makers are underestimating how quickly the economy will reach various thresholds for unemployment and inflation that will be used to trigger a rate hike.

The central bank’s inflation doves, led by Fed Chair Janet Yellen, have endorsed a cautious approach toward ending the central bank’s easy money policies, namely a gradual tapering of bond purchases and keeping interest rates at their historic lows for as long as needed.

If wage growth stays weak--even as the unemployment rate continues to fall--it would provide justification for Yellen’s dovish approach.

Meanwhile, the hawks appear to be leaning in favor of a first quarter 2015 lift off for rates, and another solid jobs report would undoubtedly advance their position.

Follow Dunstan Prial on Twitter @DunstanPrial