US rate futures lift rate hike odds in December after strong jobs report

By Gertrude Chavez-Dreyfuss

NEW YORK, June 5 (Reuters) - U.S. interest rate futures on Friday increased the chances that the Federal Reserve will raise interest rates by the December policy meeting after a blockbuster payrolls number for May, which sharply exceeded market expectations.

The rate futures market has now priced in a 68.4% chance of Fed tightening in December, compared with 52% late on Thursday, according to CME's FedWatch. For the June meeting, the market still expects the Fed to hold interest rates steady in the 3.50%-3.75% range.

Data showed U.S. nonfarm payrolls increased by 172,000 jobs last month after rising by an upwardly revised 179,000 in April. Economists polled by Reuters had forecast payrolls increasing by 85,000 jobs after a previously reported 115,000 rise in April.

"A barnburner of a print -- 172,000 tops even the most rosy economist estimate, while positive revisions raise previous understandings of the labor market," said Bradford Smith, portfolio manager at Janus Henderson Investors, in emailed comments.

"This sets up a scenario where the Fed could follow market pricing and embrace some insurance hikes."

Hopes for a rate cut have diminished, with the Fed expected to remain on hold for some time after it undertakes a series of hikes to cool rising inflation and a resilient labor market.

New Fed chair Kevin Warsh will preside at the Fed meeting later this month. Market participants said stubborn inflation will challenge Warsh more than the jobs environment as he encounters a potentially divided group of policymakers.

The challenge with the current inflation picture, analysts said, is that it is being driven by multiple factors, many of which cannot be effectively addressed through higher interest rates. For example, raising rates will not bring down global oil prices.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Toby Chopra and Kevin Liffey)