Jobs Data Give Fed Options

Updated from 11:37 a.m. EDT

U.S. job growth continued at a robust pace in May, but wasn't considered strong enough to provoke a 50-basis-point interest rate hike at the end of this month.

Nonfarm payrolls rose 248,000 last month, surpassing expectations for an increase of 225,000. The pace of growth has slowed from April and March, when a revised 346,000 and 353,000 jobs were created, respectively.

The unemployment rate held steady at 5.6%, in line with projections and average hourly earnings rose 0.3%, slightly above the 0.2% estimate.

Ethan Harris, senior economist at Lehman Brothers, said while the headline payroll number wasn't as impressive as it had been in the previous two months, the details of the employment report were very encouraging.

Job growth was widespread in May and manufacturing employment recorded its biggest gain in almost six years. Over the past three months, some 947,000 jobs have been created, the most since March to May 2000. Still, Harris believes the odds of a 50-basis-point rate increase this month are "very low."

"Three strong job numbers in a row don't make up for three years of bad job growth," he said. "The Fed has been saying we're going to be measured...these kind of verbal promises do matter. The Fed has kept to its word, but only for a limited time frame."

At its last meeting in early May, the central bank said it would remove policy accommodation "at a pace that is likely to be measured," signaling that it would raise rates but not in large increments.

Stuart Hoffman, chief economist at PNC Financial Services Group, said a half-point rate hike is unlikely after Friday's jobs data.

"It's pretty obvious it was a very good report; the jobless recovery has been left in the dust," he said. "But I don't think the fact that we've created more jobs than expected in May and over the past three months will get the Fed to be more aggressive than they've said they intend to be."