Jobs picture gives Fed room to wait on rates

By Alister Bull and Mark Felsenthal

WASHINGTON (Reuters) - Surprisingly robust U.S. third-quarter employment growth gives the Federal Reserve breathing space as it mulls whether more interest rate cuts are needed to help the world's largest economy weather a housing slump and credit crisis.

Fed policy-makers, who aggressively cut the benchmark federal funds rate on September 18 after a report saying the economy had shed jobs in August, will feel less pressure to cut rates again at their October 30-31 meeting after fresh data that showed the labor market was actually not in such bad shape after all.

Interest-rate futures have trimmed back bets the Fed will cut by a quarter percentage point at the next meeting and in late Friday trade implied a 44 percent likelihood of a move, compared with a 72 percent chance before the latest jobs report.

This chimed with the findings of Reuters' latest poll, in which 10 out of 18 primary bond dealers surveyed thought the central bank would lower rates by a quarter point.

Upward revisions to the monthly employment report on Friday showed it added 89,000 positions in August, instead of losing 4,000, and there were 118,000 more jobs created in July and August than previously thought. For details, see ID:nN05223631.

It also added a bigger-than-expected 110,000 jobs in September, according to the Labor Department.

While that number puts the economy on pace for relatively modest employment gains, it suggests tighter credit and the prolonged housing downturn have not led to broad business retrenchment that has pushed the country toward recession.

"The September number alone suggests that economic growth has moderated, but it really hasn't fallen off the cliff at all," said John Silvia, chief economist for Wachovia.