What interest rate hikes?

The Federal Reserve can continue to raise interest rates while also reducing its balance sheet this year, Dallas Fed President Robert Kaplan said on Tuesday. Kaplan, a voting member of the Federal Open Market Committee, anticipates two more interest-rate hikes this year.

Fed Governor Lael Brainard also sounded a hawkish call on Tuesday, arguing in favor of another rate hike soon. "With the labor market continuing to strengthen, and GDP growth expected to rebound in the second quarter, it likely will be appropriate soon to adjust the federal funds rate," she told the New York Association for Business Economics.

The U.S. jobs report on Friday could go some way toward cementing the chances of a rate hike later this month. The nonfarm payrolls report for May is expected to demonstrate continued strength in the labor market. The U.S. economy is expected to have added 175,000 jobs in May, while the unemployment rate is forecast to hold at 4.4%, according to FactSet estimates. Hourly earnings are anticipated to have risen 0.2% in May.

Fed Governor Lael Brainard.
Fed Governor Lael Brainard.

The Federal Open Market Committee, the monetary policy arm of the central bank, is next set to meet June 13-14. Markets already have high expectations for an interest-rate increase at the committee's next meeting, the second of three expected hikes this year. Wall Street has priced in a nearly 89% chance of a 25-basis-point increase, according to CME Group fed funds futures.

"The employment report will garner plenty of attention, but it is unlikely to move the Fed either way," said Kingsview Asset Management's Paul Nolte. "If anything, a "hot" report could engender calls for faster rate increases. More importantly than the jobs report will be the wage gains, which have been running at historically modest rates."

So far, markets have largely shrugged off the prospect of higher interest rates. For example, shares of Amazon (AMZN) briefly hit a record of $1,000 a share on Tuesday. Meanwhile, other hot tech names such as Apple (AAPL) , Facebook (FB) and Netflix (NFLX) continue to trade with a bullish bias.

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