Wall Street economists moved en masse after Friday's surge in payrolls to predict a Federal Reserve interest rate hike as soon as June, bringing them into line with futures market forecasts.
Those analysts who had been clinging to a view the Fed would hold on all year, including HSBC Securities and CSFB, threw in the towel after a second monthly surge in payrolls, this time to the tune of 288,000 new jobs in April.
"HSBC's long-held view was that the Fed would not raise rates in 2004. We were wrong," conceded HSBC chief economist Ian Morris, adding the combined 66,000 in upward revisions to previous two months was the "icing on the cake" of a strong report.
Futures markets reacted within seconds of the release to price in a 90 percent chance of a rate hike in June, up from around 50 percent earlier in the week. The next Fed policy meeting is a two-day affair on June 29 and 30.
The surge in payrolls was more than 100,000 above forecasts and came on the heels of an upwardly revised 337,000 in March.
With signs that inflation has stabilized in recent months, economists were only waiting for confirmation that the jobs market has turned the corner to give the Fed leeway to increase the federal funds rate, at 1.0 percent for nearly a year.
The 1.0 percent rate is the lowest since 1958 and an ultra-low level that some analysts see as an anomaly in a booming economy. Even some within the Fed have voiced concern about the potential for low rates to spark imbalances elsewhere in the economy.
In the past two months, Federal Reserve officials have increasingly discussed a rate rise as inevitable — a sharp change in tone from last year — and at a policy meeting earlier this week they said increases will be "measured".
Financial markets are pricing in an increase in the federal funds rate to about 2.00 percent by the end of the year.
"It will be an easy debate at the next Fed meeting. The Fed will start tightening at the June 30 policy meeting," said Dana Johnson, head of research at Banc One Capital Markets in Chicago. Previously, he was forecasting a hike in the fourth quarter of this year.
Some analysts retained a note of caution, noting that the Fed will see one more payrolls report, for May, before its next policy meeting and that too will need to prove strong to seal the case for a rate rise.
But financial markets had no such doubts.
July futures now suggest a near-90 percent chance of a rate increase after the June 29-30 meeting of the Federal Open Market Committee, up from 60 percent at Thursday's close and 50 percent earlier this week.