WASHINGTON -- Bond market expectations that the Federal Reserve will act soon to tighten credit in a surging economy resurfaced Friday after the government reported vigorous job growth in June.
The Fed added to reserves in open market operations to keep the federal funds rate unchanged at 4.25%, but many analysts are now betting that policymakers will embark on a new round of tightening by mid-August.
The Labor Department reported that nonfarm payroll jobs in June swelled by 379,000 -- far above market expectations -- while the civilian jobless rate held steady at 6% for the second straight month. Job gains came in all major categories, led by strong increases in retail trade and other services.
Moreover, the department's revised figures for May showed nonfarm payroll jobs jumped 252,000, up sharply from the gain of 191,000 originally reported.
Clinton Administration officials hailed the report as evidence that the president is well on his way to fulfilling his campaign promise of creating eight million jobs in four years. "The great American job machine is back and humming," Labor Secretary Robert Reich told reporters at a White House briefing.
Analysts said it now looks as if the economy only took a breather in the spring and is again growing at a rapid pace that will force the Fed's hand. "It's hard to imagine GDP growth isn't around 4%," said Cary Leahy, senior economist for Lehman Brothers.
Most economists calculate that the economy can't grow faster than 2.5% to 3% without overheating, a view apparently shared by Fed officials.
"The economy is still expanding beyond its long-range potential, and that's not good," said Mitchell Held, senior financial economist for Smith Barney Inc. "The preconditions for inflation continue to build."
Held predicted that Fed policymakers will lift short-term rates before the Aug. 16 meeting of the Federal Open Market Committee. "I don't think they can afford to wait if the numbers keep coming in like this," he said.
Other analysts are expecting officials to hold off until the August FOMC meeting. "They don't want to be seen as reactive," said Kevin Logan, chief economist for Swiss Bank Corp. "They want to be seen as preemptive and measured, but I bet they're tempted."
Treasury Secretary Lloyd Bentsen, asked by reporters in Naples whether the jobs report was cause for the Fed to raise rates, said, "At this point I don't." He was interviewed as Clinton began meeting with leaders of other industrial nations at the economic summit.
As expected, the president conveyed an upbeat message about U.S. economic performance and deficit reduction in comments he made in Naples. But he also told reporters that intervention in foreign exchange markets to shore up the dollar would have only a "transitory impact" -- a comment that immediately sent the dollar lower as traders concluded that Group of Seven nations would not coordinate a round of dollar-buying.
In afternoon trading in New York, the dollar slipped to 97.90 Japanese yen and 1.6518 German marks. "The guy is saying 100% the right things, but for whatever reason they don't believe him," Logan said. "Increasingly he has no credibility."
Administration officials sought to play down market fears of an upturn in inflation. Laura Tyson, head of the President's Council of Economic Advisers, said the June report "paints a picture of a sound expansion with subdued inflation." Over the past year, average hourly earnings have increased 2.5%, only slightly above the rate of inflation as measured by the consumer price index, she said.
Reich repeatedly referred reporters to the Blue Chip survey of private economists, who on average expect the CPI to rise less than 3% this year. As the economy improves further, "we'll start seeing wages moving upward," Reich said, but he argued that given recent gains in productivity, "there's plenty of room for wage improvements without worrying about inflation."
Analysts nonetheless believe a 6% unemployment rate in a solid expansion is close to the point where job gains start building wage increases that fuel inflation. Many had been expecting the rate to edge back up to 6.2%.
Some of the strength in the June figures reflected a late survey date because of the Fourth of July holiday that captured more than the usual number of gains in nonfarm payroll jobs. Reich said the actual total of 379,000 could have been overstated by as much as 80,000 to 100,000.
Still, analysts called the report unambiguously strong. They noted that May and April figures were revised up to produce gains of more than one million jobs for the second quarter.
Dean Patterson contributed to this article.
