US jobs growth may spark interest rate rise

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The Independent Online

A rise in short-term US interest rates at the end of this month became a near certainty yesterday after figures showed the economy created almost a quarter of a million new jobs in May, underlining the vigour of the current recovery.

A rise in short-term US interest rates at the end of this month became a near certainty yesterday after figures showed the economy created almost a quarter of a million new jobs in May, underlining the vigour of the current recovery.

According to the Labour Department, non-farm payrolls increased by 248,000 last month. This means more than 950,000 new jobs have been generated in the latest quarter, the fastest rate of the Bush presidency. The headline unemployment rate, however, held at 5.6 per cent, reflecting a surge in the number of officially registered job-seekers, encouraged by the improving labour market.

The latest report, coupled with others suggesting that the economy is growing at a healthy rate, leaves little doubt that the policy-making Federal Open Market Committee will raise its benchmark overnight rate when it next meets on 29 June.

The overnight federal funds rate has been held for more than a year at a 45-year low of just 1 per cent, but Alan Greenspan, the Fed chairman, has been dropping ever clearer hints that, with inflation starting to pick up slightly, this era of cheap money is drawing to an end.

Economists now consider that a 0.25 per cent increase is inevitable. Some believe Mr Greenspan will push for a rise of 50 basis points.

The jobs gains were spread across the spectrum, although the best performance came in service industries. The long-struggling manufacturing sector added 32,000 jobs in May, the fourth successive monthly improvement.

The Labour Department report will delight the White House which, despite sustained GDP growth of 4 per cent or more for the past year, has been struggling to get across its crucial election-year message that the economy is good shape and getting better. "What a difference a year makes," Don Evans, the Secretary of Commerce and a close confidant of the President, said yesterday. "A wake-up call has been sent, that the US economy is back."

But the Bush-Cheney campaign has yet to reverse distinctly gloomier public impressions. If anything pessimism is growing, with almost 60 per cent of the population believing that the country is "on the wrong track," according to the latest polls.

Moreover, whatever happens in the next few months, Mr Bush is still set to be the first president since Herbert Hoover, at the start of the Great Depression, to see a net loss of jobs over his four-year term.

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