The U.S. added 288,000 jobs in June, a figure that suggests growing stability in labor markets and could prompt monetary policy makers to rethink their timetable for raising interest rates.
The unemployment rate fell by 0.2 percentage point to 6.1% last month, according to data released Thursday by the U.S. Department of Labor. Economists had forecast 212,000 new jobs and that the unemployment rate would hold steady at 6.3%.
"Five consecutive months of job creation north of 200K is a most welcome development and the Federal Reserve will certainly take note," Dan Greenhaus, chief global strategist at BTIG, said in a note to clients.
"However, absent observable and building inflationary pressures beyond what has already been observed, we’re not sure Fed officials are set to meaningfully change their public tone."
Peter Boockvar, chief market analyst at The Lindsey Group, took a more hawkish tone: "Yellen is not going to be able to wait until May 2015 to raise rates and that is what the U.S. Treasury market is responding to today," he said in an e-mail.
Indeed, the yield on the 10-year Treasury bond rose 0.04 percentage point to 2.67% following the report. Bond yields move in the opposite direction of prices.
The Fed is facing a critical phase as it winds down its unprecedented stimulus programs initiated during the 2008 financial crisis. The central bank’s asset purchasing program, known as quantitative easing, is scheduled to end in the fall, and the Fed’s next big step is to start raising interest rates from historic lows.
Fed policymakers are split over the timing and trajectory of rate hikes. A majority, so-called inflation doves led by Fed Chair Janet Yellen, are advocating a cautious approach to lifting rates, fearful that moving too soon could cause another setback to the fragile recovery. Meanwhile, a vocal minority -- the inflation hawks -- believes raising rates sooner rather than later will fend off runaway inflation.
Yellen, in fact, said in a speech Wednesday that she isn't too concerned yet about low rates causing additional financial instability or sparking asset bubbles.
Inflation, which has run well below the Fed’s 2% target rate for months, has emerged as a primary indicator the Fed is looking at to determine future monetary policy. If labor markets are tightening, as the data suggests, demand for workers will rise, pushing up wages. Higher wages will ultimately lead to higher prices, ie., inflation.
As it stands, the consensus among Fed policy makers is that rates will probably start to move higher in mid-2015. Inflation hawks could use the strengthening labor market as justification to push for an earlier lift off, perhaps in the first quarter of 2015.