U.S. jobs report clears way for Fed to flag June rate hike

By Jonathan Spicer NEW YORK (Reuters) - America's tumbling unemployment rate and better-than-expected job gains in February should give Federal Reserve officials confidence this month to pave the way, though not commit, to an interest rate hike in June. Data released Friday showed that U.S. unemployment dropped to a six-year low of 5.5 percent last month, within the range the Fed considers full employment, suggesting that winter weather does not appear to be derailing the economy as it did last year. While wage gains were only slight, analysts said the Fed was now likely to drop a reference to patience on the timing of a rate hike when it issues a policy statement on March 18. Dropping "patient" in March would open the door for a June hike. "To my mind, June has to be on the table. I think it's a live option," said Richmond Fed President Jeffrey Lacker, a voter this year on monetary policy. "Given today's employment report, right now, June would strike me as the leading candidate for lift off," he said on SiriusXM radio. Yields on Treasury bonds jumped as investors predicted a more aggressive series of rate rises. Futures traders saw an improved chance the Fed would hike at a June meeting, though the odds were better than even that September was more likely. "This much stronger-than-expected (jobs) number could push that date up," said Tracie McMillion, North Carolina-based head of asset allocation at Wells Fargo Investment Institute. Rick Rieder, chief investment officer of fundamental fixed income at BlackRock, said "all signs" now point to a rate rise June or September. The central bank, which has signalled a first policy tightening some time around mid-year, has shifted its focus squarely to still-weak inflation as it mulls when to move. The report showed 295,000 new jobs but only a three-cent rise in average hourly earnings, which could give the Fed pause. While a near majority of the Fed's 17 policymakers have pushed to have the option of a June hike on the table, the lingering question is whether unemployment has fallen enough to push up wages and overall U.S. inflation even as overseas economies battle disinflation. Some policymakers have recently lowered their estimate of this longer-term unemployment level, despite median Fed forecasts in January that put it at 5.2 to 5.5 percent. Those forecasts will be updated at the March meeting. John Williams, the influential head of the San Francisco Fed and a centrist on policy, surprised some economists when he said late Thursday that a rate hike should not be delayed too long for fear of "drastically" overshooting on inflation. Last week, Fed Vice Chair Stanley Fischer suggested that the June and September policy meetings were centre stage as his colleagues debated when to hike rates from near zero. Speaking at a New York conference, Fischer cited the gap between Fed and investor expectations, saying a hike could bring a market "correction" that "will add to the credibility of what we are saying." (Reporting by Jonathan Spicer; Additional reporting by Michael Flaherty in Washington; Editing by Alan Crosby and David Gregorio)