US jobs lift Fed bond hopes

US employers hired more workers than expected in July and raised their wages, signs of labour market tightness that likely clears the way for the Federal Reserve to announce a plan to start shrinking its massive bond portfolio.

The US Labour Department said non-farm payrolls increased by 209,000 jobs last month amid broad-based gains. June’s employment gain was revised up to 231,000 from the previously reported 222,000.

Average hourly earnings increased 9c, or 0.3%, in July after rising 0.2% in June. That was the biggest increase in five months. On a year-on-year basis, wages increased 2.5% for the fourth straight month.

“It was strong across the board. It puts (the Fed) still on track to start the programme to wind down the book in September and it’s a long ways off in December for the next rate hike,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York.

Lack of strong wage growth is surprising given that the US economy is near full employment, but July’s monthly increase in earnings could offer some assurance to Fed officials that inflation will gradually rise to its 2% target.

Economists expect the Fed will announce a plan to start reducing its $4.2tn portfolio of Treasury bonds and mortgage-backed securities at its next policy meeting in September. The Fed bought these securities to lower interest rates in the wake of the 2007-2009 financial crisis.

Sluggish wage growth and the accompanying benign inflation, however, suggest the US central bank will delay raising interest rates again until December.

The Fed has raised rates twice this year and its benchmark overnight lending rate is in a range of 1% to 1.25%.

Still, some slack remains in the labour market. A broad measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, was unchanged at 8.6% last month.

The composition of the job gains in July mirrored June’s.

Manufacturing payrolls increased by 16,000 jobs, the largest increase since February.

Employment in the car sector rose by 1,600 despite slowing sales and bloated inventories that have forced manufacturers to cut back on production. n Reuters