Vibrant jobs growth paves way for Fed to raise US interest rates

The US Fed’s chair Janet Yellen has said previously that she would only consider an interest rate rise once the jobs market had improved

People walk into a meeting of the Board of Governors at the Federal Reserve, October 24, 2013 (Getty)

The US Federal Reserve is a step closer to hiking interest rates before the end of the year thanks to storming jobs figures and rising wages last month that also sent the dollar soaring yesterday.

The latest figures showed that 271,000 new jobs were created in the US in the last month with unemployment dropping 5 per cent – down 1.1 million compared with the same time last year.

Predictions by analysts and commentators were smashed and those who had feared the slowdown in China was starting to affect the US market hastily retreated.

The US Fed’s chair Janet Yellen has said previously that she would only consider an interest rate rise once the jobs market had improved, and if the next set of figures – due in a month – are equally positive then economists say a rate rise is certain.

Rob Carnell, an analyst at ING, said: “Following a disappointing run of labour reports, the October figure substantially surpassed the consensus view in nearly all respects.

“And whilst this does not guarantee a December rate hike from the Fed – there is one more labour report before the 16 December meeting – at this stage, we feel that we would need to see a catastrophically bad November report for the Fed to sit on its hands again in December.”

The jobs rise is the highest hike this year and takes the unemployment rate in the US to its lowest level in seven-and-a-half years. Hourly pay packages also rose by 2.5 per cent, which was the fastest rise since July 2009 and comes after months of protests in several low-paid sectors.

Jim O’Sullivan, an economist at High Frequency Economics, said: “This is an unambiguously strong report. It is more than strong enough to keep the unemployment rate coming down.

“We are starting to see more evidence of wages accelerating – that is not even a precondition to tightening, but it adds to the case.”

The figure means the job growth in the past three months has averaged 187,000 per month, slower than the 210,000 in the first half of the year but it beat expectations of 180,000.

Paul Ashworth, at Capital Economics, said the strong figures “confirms that the weakness in August and September was just a temporary blip and, given the circumstances, a December interest rate hike would now appear to be the most likely outcome”.

August and September numbers were also revised up by 12,000.

There was as a sharp rise in bond yields, with the two-year Treasury yield jumping to a five-and-a-half year high, and the dollar also shot up, sending the pound down 0.9 per cent to $1.5076 and the euro down 1.4 per cent to $1.0736.

Ms Yellen told Congress earlier this week that a rate rise was a “live possibility” if US data continued to improve . The data also suggests that inflation is likely to hit 2 per cent – the Fed’s target.