WASHINGTON -- Bond market expectations of another credit-tightening move by the Federal Reserve were strengthened Friday after the government reported that the civilian unemployment rate tumbled to a fouryear low.

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The Labor Department said the jobless rate fell from 5.8% to 5.6%, the lowest level since August 1990. Most economists consider a 6% unemployment rate to be the threshold for keeping wages and salaries under control. A separate survey from the department said non-farm payroll jobs surged by 350,000, the biggest monthly increase since June.

Coming on the heels of other reports last week showing strong gains in personal income, consumer confidence, and manufacturing activity, analysts said the only question is when the Fed will act again to restrain the economy.

"It suggests clearly that the economy will continue to grow at an aboveaverage pace, one that is unsustainably high, and the Fed is going to be forced to tighten monetary policy and try to slow things down," said Sally Kleinman, an economist with Chemical Securities Inc.

Analysts at Chemical Securities estimate that the economy grew an eyepopping 4.5% in the final three months of the year and will grow about 3.5% in the first six months of 1995. Fed officials are trying to bring growth down to about 2.5%.

Bear, Stearns & Co., where the chief economist is former Fed governor Wayne Angell, told clients that the central bank is likely to boost rates on Dec. 20 at the next meeting of the Federal Open Market Committee.

Other analysts believe policymakers will hold off until a Jan. 31 and Feb. 1 meeting of the FOMC. But in some ways the question is academic because the bond market has been pricing in another tightening anyway. Two-year notes on Friday were paying 7.5%, an unusually large spread compared with a federal funds rate of 5.50%.

Surprisingly, the long end of the market reacted favorably to the employment report and sent the yield on the Treasury's 30-year bond plunging to 7.91% in afternoon trading. "Investors are feeling that the Fed will be tightening monetary policy and that inflation will be kept in check," Kleinman said.

Raymond Worsek, chief economist for A.G. Edwards & Sons Inc. in St. Louis, said traders see a flattening yield curve that is signaling a buying opportunity for bonds. "Bonds are fundamentally undervalued from the inflation and economic perspective for the next year or two," he said.

At Merrill Lynch & Co., analysts told clients in a markey letter that the flattening yield curve means that "U.S. economic growth will slow sharply during 1995" as the Fed's rate increases take hold.

In foreign exchange markets, the dollar surged as investors anticipated higher U.S. interest rates. Against the Japanese yen, the dollar climbed back above 100, and it hit 1.5810 against the German mark.

In an interview on CNBC, Federal Reserve Board governor Lawrence Lindsey noted that the bond market has been moving up since the Fed's last increase in short-term rates on Nov. 15. "The bond market thinks we're on the right track," he said.

Administration officials hailed the employment report as more evidence that the economy is on a high roll without generating additional inflation.

"The Goldilocks recovery continues -- not too hot and not too cold. It's just right. We're seeing buoyant jobs growth without any sign of accelerating inflation. You couldn't have it any better than this," Labor Secretary Robert Reich told reporters at the White House. He was joined by Laura D'Andrea Tyson, head of the president's Council of Economic Advisers, and Robert Rubin, coordinator of the National Economic Council.

"In fact, there's plenty of room for Goldilocks to get a raise," Reich added.

Some aspects of the employment report encouraged analysts. The total workweek in the private sector fell to 34.6 hours from 34.9 hours, and hourly earnings slipped 2 cents to $11.22. As a result, average weekly hours dropped 1.0% to $388.21. Compared with a year earlier, weekly earnings were up only 2.6%.

Analysts said the drop in earnings will probably translate into a decrease in personal income in November.

However, total hours worked and overtime hours remained at "extremely high" levels, Labor Department officials said. Analysts were also more impressed with the widespread increases in employment and the drop in the jobless rate to 5.6%.

Labor and product markets continue to tighten, and that is what will force the Fed's hand again in raising rates said John Ryding, managing director at Bear Stearns.

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