Tape Measures Fed's Nerve

Updated from 9:32 a.m. EDT

After a much stronger-than-expected employment report Friday, investors are starting to wonder just how "measured" interest rate hikes will be this year.

Financial markets now believe a quarter-point rate increase in June is practically a slam dunk, and talk of a larger move next month or a string of rate hikes this year has begun to swirl.

The economy added 288,000 jobs in March, much better than the 165,000 gain expected by economists. Meanwhile, the unemployment rate fell to 5.6% from 5.7% and payroll data for February and March were revised higher.

Bill Cheney, chief economist at MFC Global Investment Management, said a rate hike in both June and August is a possibility now, although he doubts that will happen.

The Federal Reserve "will have the benefit of another month's worth of data, including the May employment report, before their June meeting," he said. "If those figures show an even more rapidly improving economy, it's not inconceivable (but still unlikely) they could move in both June and August."

In its policy statement on Tuesday, the Fed said any rate increases would come "at a pace that is likely to be measured," signaling that a repeat of 1994 wouldn't be in the cards. Back then, rates moved up 2.25 percentage points in just over nine months.

After the recent jobs data, some investors are worrying that the Fed won't be able to keep its promise. Bonds plunged Friday, with the 10-year Treasury falling more than a point to yield 4.76%, the highest level since July 8, 2002. Stocks were generally mixed.

"I know that there are people speculating about a 50-basis-point move," said Ethan Harris, senior economist at Lehman Brothers. "But it's hard to imagine a number that gets the Fed to go 50 basis points."