Strong US job growth, rising wages set stage for Fed rate hike

US employers hired workers at a robust pace in February, beating expectations, and wages grinded higher, which could give the Federal Reserve the green light to raise interest rates next week despite slowing economic growth.

Nonfarm payrolls increased by 235,000 jobs last month as the construction sector recorded its largest gain in nearly 10 years due to unseasonably warm weather, the Labor Department said on Friday. The economy created 9,000 more jobs in December and January than previously reported.

Fed Chair Janet Yellen signaled last week that the US central bank would likely hike rates at its March 14-15 policy meeting. Job gains have averaged 209,000 per month over the past three months. The economy needs to create roughly 100,000 jobs per month to keep up with growth in the working-age population. "By any measure this report is consistent with an exceedingly healthy labor backdrop and, I think more critically, it's a number that will embolden the Fed to raise rates in March," said Tom Porcelli, chief US economist at RBC Capital Markets in New York.

US short-term interest rate futures initially rose after the data, while prices of US Treasuries pared earlier losses. US stock index futures were trading higher, while the dollar DXY was weaker against a basket of currencies.

The unemployment rate fell one-tenth of a percentage point to 4.7 percent, even as more people entered the labor market, encouraged by the hiring spree. Economists polled by Reuters had forecast employment increasing by 190,000 jobs last month.

The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, increased one-tenth of a percentage point to 63 percent, the highest level since March 2016.

The employment-to-population ratio rose to 60 percent, the highest since February 2009, from 59.9 percent in January.

With the labor market near full employment, wage growth could speed up as companies are forced to raise compensation to retain employees and attract skilled workers.

According to economists, wage growth of between 3 percent and 3.5 percent is needed to lift inflation to the Fed's 2 percent target. But inflation is already firming, in part as commodity prices rise.

Rising inflation, together with a tighter labor market, stock market boom and strengthening global economy, has left some economists expecting that the Fed could increase rates much faster than is currently anticipated by financial markets.

The US central bank lifted its benchmark overnight rate in December and has forecast three rate increases for 2017.

Reuters