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Jobs report provides ammo for rate hike

Kevin Dobbsis a senior reporter and columnist. The views and opinions expressed in thispiece represent those of the author or his sources and not necessarily those ofS&P Global Market Intelligence.

Communitybanks eager to see Federal Reserve policymakers boost interest rates this yeargot shots of positive data in the government's latest .

Employersadded 156,000 jobs in September, according to the U.S. Labor Department'smonthly employment situation report. That number is lower than the 2016 average — about 180,000 before September — and well below the averagesof more than 200,000 for last year and the year before.

Butnestled within the latest report were nuggets pointing to an economy near fullemployment, generating higher pay for the typical worker and drawing morepeople into the labor force, economists say.

TheFed's policy arm is tasked with guiding the economy toward maximum employmentwhile maintaining a healthy but manageable level of inflation. The latter hashovered below the Fed's target in recent years, leaving the economy at risk ofdeflation. But rising wages are key to boosting inflation, and economists saythat, if policymakers continue to see pay increases, they will have theammunition they need to lift rates. A stable economy can absorb risingborrowing costs, economists say, and higher rates help prevent inflation fromsurging.

"Keymeasures are definitely moving in the right direction," Scott Brown, chiefeconomist at Raymond James, said in aninterview. "For the Fed, they have more signals that we are atleast close to full employment."

Ofimportance in the latest job report was decent wage growth and a growing laborforce.

Averagehourly earnings rose by six cents to $25.79 in September. Through the firstnine months of this year, such earnings are up 2.6%, well above the roughly2.0% level of the previous two years, Brown said. There is still room foradvancement, he said, as he and many economists think wage gains cansubstantially surpass 3% in a robust economy.

"Butthings are picking up," Brown said. "And there is reason to thinkthat could continue to build."

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Notably,Brown said, the labor force participation rate is on the rise. It was 62.9% inSeptember. That is still near a four-decade low. But it marked the highestlevel since February, and Brown said that, with the massive Baby Boomergeneration steadily moving into retirement and naturally drawing down the poolof available workers, a gradually rising participation rate is all economistscan reasonably expect. Greater participation happens when companies are growingand sense that they need to pay more to attract people into the labor forcebecause there are fewer available workers, Brown said.

"Soit is positive to see people coming off the sidelines for better payingjobs," he said.

TheSeptember unemployment rate ticked up to 5.0% from 4.9% the previous month, butthis happened because the work force grew by more than 400,000 Americans.

Allof which suggests the labor market is tightening. As this happens, the headlinejobs gain each month is likely to remain below the robust figures of the pasttwo years. But if the participation rate continues to rise along with wages,Brown said, Fed policymakers could feel comfortable raising interest rates.

Browndoes not see the Fed acting at its next meeting in November, simply becausethat gathering comes just before the presidential election, and policymakers,concerned about appearing nonpartisan, are not likely to make major news beforevoters head to the polls. So he sees the Fed moving on rates in December.

Jack Ablin, chiefinvestment officer at BMO Private Bank and a Fed observer, agreed. He said inan interview that if the September momentum continues for the next couplemonths, that would be "strongenough to justify raising rates."

Thatsaid, he added, the Fed has proven consistently cautious on rates for severalyears, having boosted them only once, late in 2015, since the last recession."So I would not be surprised to see a rate hike in December, but then notagain for some time. It could be another one-and-done kind of thing."