Federal Reserve policymakers already skeptical of the need for an interest-rate hike this month gained some ground against their more hawkish colleagues after a government report Friday showed U.S. job gains slowed last month.
But as long as data in the next few months suggests continued moderate economic growth and a rise in inflation toward the Fed's 2-percent target, Fed policymakers look likely to back a December rate hike as a prudent step toward normalizing what has been nearly a decade of ultra-easy monetary policy.
The Fed raised short-term interest rates last December by a quarter of a percentage point, but have left them unchanged so far this year. Last week, Fed Chair Janet Yellen said an improving labor market and signs that inflation are firming have strengthened the case for a rate hike, and most regional Fed bank presidents as well as Fed Vice Chair Stanley Fischer appear to back a rate hike sooner than later.
Some analysts continue to expect the Fed to raise rates this month, including economist Jan Hatzius at Goldman Sachs who said the August job gains are "just enough" to be convincing. August figures are often revised higher in subsequent months.
Even without any revision, monthly average job gains for the most recent three months register 232,000, more than double the level that Yellen says is needed to keep the unemployment rate steady.
"It appears that the funds rate should be significantly higher than it is now," Richmond Fed President Jeffrey Lacker, a consistent advocate for a rate hike even when the unemployment was higher than its current 4.9 percent, said Friday.
Lacker also said the August payrolls data suggests the job market is still tightening.
But with resistance among other key Fed policymakers to a near-term rate hike strong, a September rate hike was already seen as unlikely before the jobs report.
Traders of interest rate futures see about a one in four chance of a rate hike at the Fed's Sept. 20-21 meeting.
December, however, is another story, with the rate futures market seeing about a 60 percent chance of a rate hike then.
While the August gain of 151,000 jobs was less than expected, it is still plenty to provide work for new job entrants as well as any discouraged workers reentering the labor market.
And Fed officials have long said they expect job gains to slow as the U.S. economy nears full employment.
"Most (Fed policymakers) think another rate hike sometime soon is the right thing to do," Roberto Perli, Cornerstone Macro economist wrote after the report. "A rate hike this year was a solid base case before the employment report, and still remains a solid base case now."
(Reporting by Ann Saphir; Editing by Chizu Nomiyama)