Traders see stronger chance of Fed rate hike in 2016

August 5, 2016 9:21 AM EDT

The Federal Reserve headquarters in Washington September 16 2015. REUTERS/Kevin Lamarque

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By Ann Saphir

(Reuters) - Traders on Friday boosted bets that the U.S. Federal Reserve could raise interest rates as soon as December after a government report showed U.S. employers added more jobs than expected last month.

Traders are now pricing in about a 46 percent chance of a rate hike by the end of the year, up from about 34 percent before the report, based on trading in futures contracts tied to the Fed's benchmark policy rate.

They now expect a rate rise as more likely than not by May, compared with late 2017 before the report.

Nonfarm payrolls in July increased by 255,000, hourly wages rose a healthy 8 cents, and more people returned to the workforce, the government report said.

“It shows the economy, from a labor perspective, is heading in the direction that the Fed wants," said Doug Duncan, chief economist at Fannie Mae in Washington.

Still, he said, the Fed continues to eye international developments, which could influence the Fed's decision on when next to raise rates.

The Fed last raised rates in December, ending seven years of rock-bottom rates, but has been unable to raise them further since then largely as slow growth in China and Europe have boosted the dollar and trimmed domestic economic growth.

(Reporting by Ann Saphir with additional reporting by Richard Leong; Editing by Jeffrey Benkoe)

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