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Full steam ahead for Fed on strong jobs report

U.S. employment growth beat expectations in November, virtually ensuring the Federal Reserve will raise rates another 25 basis points in December, economists said. The current federal funds rate target is between 1% and 1.25%.

Nonfarm payroll employment increased by 228,000 in November as the unemployment rate held steady at 4.1%, the U.S. Department of Labor said in its Dec. 8 report.

Not only were job gains better than expected — TD Securities said in a note that its consensus was for 195,000 — the increases were across the board. Professional and business services were up 46,000, manufacturing added 31,000 jobs, healthcare was up 30,000 and construction added an additional 23,000 jobs, the Labor Department said.

The dollar gained against the euro, yen and pound after the report, while the yield on 10-year Treasuries rose one basis point to 2.376%. The S&P 500 stock index gained 0.5% by 12:50 p.m. ET.

While employment saw broad gains, wages grew a mere 0.2% month over month, which leaves the year-over-year rate at 2.5%, the average for the year, TD Securities said.

The Fed has been looking for indications that increased wage growth would put upward pressure on inflation, which has remained stubbornly below its 2% target.

Bank of America Merrill Lynch economists said in a note that the jobs report would be "acceptable" to the Fed and "keeps them on track for a hike at next week's FOMC meeting."

With core inflation data tending toward the stronger end, Bank of America economists said they still expect three more rate hikes in 2018.

Personal consumption expenditures excluding food and energy, the Fed's preferred measure of inflation, rose 0.2% month over month in October, up 1.4% over the last 12 months to October, the same as in September, the Commerce Department said Nov. 30.

S&P Global Ratings' U.S. chief economist, Beth Ann Bovino, also said the expectation was for three more rate hikes in 2018, following the one in December.

However, she also said "there may be too many challenges" to overcome for President Donald Trump's promised 6% GDP growth to materialize in 2018.

"We forecast 2.6%," Bovino said in a research note.