WASHINGTON (AFP) - The unexpected boom in US job creation in October has locked in an interest rate rise and will likely encourage another tightening in December, analysts said.
Economists said a quarter-point rise in the federal funds target rate -- to 2.0 percent from 1.75 percent -- was all but set for the next Federal Reserve policymakers' meeting.
US Federal Reserve chairman Alan Greenspan and his colleagues gather Wednesday to ponder the outlook for interest rates. A statement explaining the decision is due about 2.15 pm (1915 GMT).
The big question is when a series of rate increases, which has lifted the federal funds target rate to 1.75 percent from an "embarrassingly low" 1.0 percent -- will come to a halt.
Mounting speculation of a pause in December was curtailed by a government report Friday showing the US economy churned out a seven-month record of 337,000 jobs in October.
The news is likely to persuade Greenspan he can tighten interest rates without stalling economic activity, analysts said.
"For now, Greenspan can point to the newest jobs evidence to buttress the case for a quarter point rate hike in November, and with only one more month of data, a final quarter point hike now looks to be in the cards for December," said CIBC World Markets senior economist Avery Shenfeld.
"Nervous markets might price in more after that, but let's wait until we see how growth and employment bear up under the fourth quarter's energy price drag before concluding that the Fed has more work to do in 2005."
The debate in the markets now centered on whether the Federal Reserve would pause the tightening cycle in December, said Lehman Brothers analyst Ethan Harris.
"Clearly the strong payroll report increases the odds of a December rate hike," he said.
"However, both the overall data flow and Fed rhetoric argue that the Fed is entering a new data dependent phase."
Harris suggested the US economy had slowed to a pace in line with its long-term trend.
The US economy expanded at a slower-than-expected 3.7 percent annual pace in the third quarter of 2004, latest data show. It represented an acceleration, however, from 3.3 percent in the second quarter.
"Looking ahead, the economy is more likely to slow further than to reaccelerate," Harris argued.
"Unless oil prices fall sharply, the oil shock will continue to weigh on growth in the next several quarters and the stimulus from zero-percent loans, cash-out mortgage refinancing and last year's tax cut will continue to fade," he warned.
"The economy continues to behave as though it needs unusually easy credit conditions just to achieve trend-like growth."
Banc One chief economist Diane Swonk said the jobs rebound had swung the chances of a December increase from about even to modestly in favor.
But the Federal Reserve would be more willing to take a break in 2005, she forecast.
"Once they pass the two percent threshold -- not that that is by any means a target -- it gets them back into more respectable territory relative to their peers abroad," Swonk said.
"One of the issues facing the Fed right now is that rates are almost embarrassingly low."
11/09/2004 - 18:14 GMT - AFP