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Full steam ahead for Fed rate hikes after strong employment report

The Federal Reserve received more support for its thesis that inflation is around the corner as strong January jobs data and the fastest wage growth in nine years added further fuel to a bond sell-off and boosted the chances of four interest rate hikes this year.

The U.S. economy added 200,000 jobs in January, when economists had expected 180,000. Construction, restaurant services, health care and manufacturing continued the strong hiring trend seen in December and unemployment remained at 4.1%, the Dept. of Labor said in a Feb. 2 report.

More important to the central bank's expectations that inflation is likely to pick up toward its target was wage growth: up 2.9% year-over-year, the fastest rate since the financial crisis in 2009. December's wage growth was also revised up, to 2.7% from 2.5%.

"We have been hoping for some time to see a turnaround, and it does finally look as though something is happening," ING economists wrote in a research note.

Though hiring has mostly met expectations during the U.S. economy's upswing, wage growth has lagged, leaving the Fed facing the conundrum of trying to raise rates while inflation was still tepid.

"The labor market has generated 88 consecutive months of payrolls increases, the longest streak in history," Ward McCarthy chief financial economist for investment bank Jefferies said in a research note.

Markets also moved to price in higher inflation expectations.

Yields on the U.S. benchmark 10-year Treasury were up 54 basis points to 2.846, the highest in four years. The dollar rallied, with the euro dropping 0.60% to $1.2432.

Equity investors were less enthused by the prospect of faster price growth and higher interest rates, particularly at a time when speculative grade companies are laboring under decade-high measures of leverage. The S&P 500 fell 0.95% to 2795.29 by 10 a.m. in New York.

At its January meeting this week, the Fed called employment gains "solid," and said its inflation expectations "have increased in recent months."

Market analysts are expecting at least three rate hikes in 2018, with the next predicted for March.

"Today's employment report checks all the boxes for the Fed: a good combination of strong growth and price data," economists at Bank of America Merrill Lynch wrote in a research note. "At the moment, a March rate hike is all but a lock with markets placing over 90% probability. As long as financial conditions remain benign and there is no material change in the trend in the data, March rate hike looks to be a go."

Beth Ann Bovino, S&P Global Ratings chief economist, went further, writing in a note that "this solid jobs market environment, together with a pickup in wage pressure and on top of healthy U.S. economic activity ... increases the chances that the Fed may elect to do four rate hikes in total this year."