Wall Street sees Fed rate hike by year-end after jobs data

A solid US jobs report for September reinforced expectations among Wall Street's top banks that the Federal Reserve would raise interest rates by the end of the year, according to a Reuter’s poll conducted on Friday.

Fourteen of the 15 primary dealers that responded to the poll forecast a rate hike at the US central bank's December meeting. Primary dealers are the banks that do business directly with the Fed.

This compared with 13 of 14 dealers in a similar poll done on September 2 following the August jobs report.

"It's in line with what the Fed had expected. It keeps them on track to hike in December," Brett Ryan, an economist at Deutsche Bank in New York, said of the September payrolls report.

Looking beyond December, 10 of 15 economists forecast at least two rate hikes in 2017, compared with nine of the 12 economists in the September 2 poll.

While a number of Fed officials have said the November 1-2 policy meeting is "live," some of the analysts at the 15 primary dealers which responded downplayed the likelihood of a rate hike before a tight US presidential election on November 8.

"I can't imagine they want to inject themselves into the politics," said Omair Sharif, senior US economist at Societe Generale in New York.

The median probability for a rate hike at the Fed's November meeting was 12.5 per cent, down slightly from 15.0 per cent in the prior Reuters poll.

The labour market, while far from robust, has showed resilience despite weak investment spending from companies and lacklustre overseas demand for U.S. goods and services.

US employers hired 156,000 workers last month, fewer than a revised 167,000 increase in August and below the 175,000 gain forecast among analysts polled by Reuters.

Other aspects of the latest payroll report, however, signalled improvement in the labour market, economists said.

The jobless rate edged up to 5.0 per cent stemming from a pickup in Americans looking for work. Average hours and wages also grew in September.

Some Fed officials said this week an improving job market, together with evidence of rising inflation toward its 2 per cent goal, would warrant another rate increase since the hike last

December, which was the first rate increase in nearly a decade.

"We have made progress on both (of the Fed's) mandates," Cleveland Fed President Loretta Mester told reporters on Friday after a speech at an event organised by the Manhattan Institute. She said the case for a rate increase "has strengthened."

Market-based forecasting tools, such as federal funds futures, suggested traders saw less than a 10 per cent chance of a rate hike at the Fed's November meeting.

Rate futures implied traders expected about a 70 per cent chance the Fed would lift its target range on short-term rates by a quarter point at its December 13-14 meeting.