Job market slowdown, rising wages may fit Fed's playbook

By Howard Schneider

WASHINGTON (Reuters) - A slowdown in U.S. hiring coupled with a jump in wages last month dovetails with what the Federal Reserve expected as the economy approaches full employment and is not likely to alter its interest rate hike trajectory.

The Labor Department reported on Friday that 160,000 jobs were added in April, short of the 215,000 expected by economists and below the recent monthly average of 200,000, tempering hopes of a strong economic rebound in the second quarter.

Although some investors viewed the report as a red flag for the U.S. central bank, the influential head of the New York Fed said the he wasn't too concerned by the data and that two interest rate hikes this year were still a "reasonable expectation."

"It's a touch softer, maybe, than what people were expecting, but I wouldn't put a lot of weight on it in terms of how it would affect my economic outlook," New York Fed President William Dudley told the New York Times.

The Fed signaled in March it expected to raise rates twice this year, though prices in the fed funds futures market suggest investors see just one increase in 2016.

Some analysts said the data, especially if the rise in wages triggered higher inflation, could push the U.S. central bank closer to hiking rates, perhaps as soon as June.

"Employment was never going to continue rising at more than 200,000 a month indefinitely. Those monthly gains are simply unsustainable," said Paul Ashworth, chief U.S. economist for consulting firm Capital Economics.

Indeed, Fed officials had since late last year warned of a slowdown in hiring, noting that monthly gains of 100,000 jobs would be adequate to keep the pace of economic growth aligned with population growth. Fed Chair Janet Yellen made that point in December.

Anything over that level would mean that labor market "slack" is still being absorbed. April's employment report, however, indicates remaining slack may be running out.

The labor force participation rate edged down, consistent with what Fed policymakers feel is a longer-term trend given the country's aging population. A recent rise in the labor participation rate had underpinned Yellen's argument that interest rates should be kept low to give sidelined workers more time to return to jobs, but was also viewed as likely to stall or reverse at some point.

FOCUS ON INFLATION

The number of people working part-time for economic reasons, at just over 6 million, remains 50 percent above what it was before the 2007-2009 financial crisis and recession. But it has been stuck around that level for more than half a year, a sign that progress may have stopped or that employers have shifted some jobs permanently away from full-time status.

Economic Policy Institute analyst Elise Gould is among those who believe Friday's report should prompt the Fed to keep its powder dry until it is certain that the job market recovery has been completed.

The Fed raised rates in December for the first time in nearly a decade.

"There's no incentive for a rate increase in the near future," Gould wrote.

The focus now turns to U.S. inflation data due to be released at the end of this month.

Yellen has said she is not yet convinced that recent signs of rising prices are evidence of a durable trend.

But some of the main "headwinds" holding back inflation, which remains below the Fed's 2 percent target, have seemingly begun to clear - oil prices are back above $40 a barrel, the dollar has weakened against a basket of global currencies, and there are indications of wage growth.

Average hourly earnings rose eight cents, or 0.3 percent, in April, according to the Labor Department.

"The 0.3 percent wage growth does say the pressures from the job growth we've seen are beginning to show up in wages and becoming more consistent from month to month," said Kate Warne, an investment strategist at Edward Jones in St. Louis.

"If we are looking for reasons why the Fed is potentially still going in June, it is that wages really are starting to pick up."

(Reporting by Howard Schneider; Additional reporting by Jason Lange; Editing by David Chance and Andrea Ricci)

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