Job gains raise expectations of rate increase
 
 

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By Barbara Hagenbaugh and Sue Kirchhoff, USA TODAY

Sharp job gains in March are leading economists to bump up their expectations for when Federal Reserve (news - web sites) policymakers will increase interest rates, but rates likely will still remain near historic lows through 2004.


Employers added 308,000 jobs last month, the biggest percentage gain since May 2000, the Labor Department (news - web sites) said Friday. The department also revised up its job estimates for January and February.


"This solidifies the likelihood that we're on track for a strong economy," says William Hummer, chief economist at Wayne Hummer Investments in Chicago.


While he doesn't expect the job numbers to be quite so strong month after month, Hummer says the report increased the likelihood Fed officials will raise interest rates this summer. Previously, expectations were the Fed would wait until late 2004 or even until 2005 to act.


Investors who try to predict Fed actions were betting Friday that U.S. central bankers will raise interest rates in August, up from the prior prediction of November, according to Economy.com. Bond prices sank Friday, leading to higher yields - which move in the opposite direction of prices - as investors began to price in Fed moves.


"If you get another couple of months like this ... then the Fed starts to itch to make a change," Mortgage Bankers Association economist Doug Duncan says.


But even if the Fed moves earlier, it doesn't mean rates will rapidly shoot up. The Fed's target for short-term interest rates, which influences borrowing costs across the economy, is 1%, the lowest since 1958. Even if the Fed increases rates a few times in 2004, they will still be low, historically speaking.


Plus, Fed officials have shown little worry that inflation is percolating, the main prerequisite for sharp rate rises.


Expectations for interest rate gains could lead to higher mortgage rates. But the National Association of Realtors, which expects homes sales this year to be near 2003's record pace, has already built higher rates into its forecast.


"People may have missed out on the rock-bottom rates, but rates, even with the increase, are very low," National Association of Realtors economist Lawrence Yun says.


President Bush (news - web sites) credited tax cuts for the improving job market, which has become a hot election-year issue, in his weekly radio address Saturday. "Our economy's momentum is building," he said.


Democratic Sen. John Kerry (news - web sites) said one month of big gains wasn't enough. "For too many families, living through the worst job recovery since the Great Depression has been, and continues to be, far too painful," he said in a statement.


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