Treasury prices improved modestly Friday as market participants decided two numbers released late last week improved chances the Federal Reserve will ease monetary policy again.

The combination of Friday's news that the May unemployment rate jumped to 7.5% and Thursday's report of a $10.7 billion plunge in the M2 money supply made it seem more likely the Fed will cut its funds rate target again, traders said.

Late in the day, the 30-year bond was up 3/8 point to yield 7.84%, and short-term notes were about 1/8 point higher.

Economists said the details of the May jobs report showed the economy continued to grow slowly last month, which suggests the Fed will hold policy steady. But they acknowledged that the report's headlines, and especially the jump in the unemployment rate, mean the Fed will face political pressure to lower short-term rates further.

May non-farm payrolls rose only 68,000, when the consensus forecast was for a 95,000 increase. The weaker-than-expected gain was partly offset by an upward revision in April's increase, which now stands at 182,000 after being reported last month at 126,000.

But economists said the real good news in the report came in the details, which included a 0.2-hour increase in the factory workweek, a 0.1-hour rise in the average workweek, a 0.1-hour gain in overtime, and a three-cent jump in average hourly earnings.

"Clearly there is a tremendous demand for labor services and from this report, most of it is being met by longer hours," said Robert Brusca, chief economist at Nikko Securities. "When you sweep away the headlines and look at the nitty gritty, things are strong, not weak."

The improvement in wages and hours worked means May industrial production and personal income will show healthy gains, analysts said.

Economists were skeptical of one detail in the jobs data that showed weakness, the 10,000 decline in May manufacturing employment. They said the drop in factory jobs did not jibe with reports of a pick-up in auto production and the fact that 12,000 Caterpillar employees returned to work last month.

But the biggest surprise in the May statistics was the 0.3-point jump in the unemployment rate to 7.5%, the highest level since 1984.

Analysts said the higher rate was deceptive. Unemployment rose because more people joined the labor force, not because more people lost their jobs. They also said the change showed the economic recovery was encouraging people who were out of work to rejoin the labor force, economists said.

"As people hear of improving conditions, they go out to look for work," said Robert Dieli, a business economist at Northern Trust Co.

Mr. Dieli said such an increase in the labor force usually occurred as the economy began to recover.

Still, the unemployment rate is often cited on Capitol Hill, so the increase in May's rate will translate into increased pressure on the Fed to ease its monetary policy, analysts said.

The unemployment rate "is a politically sensitive number," said Ram Bhagavatula, chief economist at Citibank.

Mr. Dieli said the 7.5% unemployment rate "will certainly provoke at least talk by the various political wings about the need to do something."

"I personally think [the Fed] will resist taking action," he added. "I think both sides of the debate in the Fed realize that whatever move they make next has to be carefully considered because the evidence is ambiguous."

Stephen Gallagher, an economist at Kidder Peabody, also expects the Fed to keep policy unchanged.

The employment statistics were in line with the kind of modest recovery Fed policymakers have been expecting, he said. "There's certainly no indication the recovery is faltering and we had to see that before the Fed would move back to a strong easing bias."

Mr. Gallagher said the Treasury market might give back some of Friday's gains this afternoon if traders' easing hopes are disappointed again.

Jan Hurley, a senior market strategist at Chase Securities, said the market was likely to trade in a range during the early part of the week, since there is no economic news until Thursday.

Ms. Hurley said some part of the recent price gains are due to the market's positive technical situation. There are no Treasury coupon auctions until late in the month and the lack of supply was exacerbated by the Fed's coupon pass last week.

"The market won't get heavy until there's more supply and that doesn't happen until late this month," she said.

Traders said they saw retail buying of short-term and intermediate securities as prices headed higher Friday morning.

During the afternoon, Treasury prices drifted off their highs. Traders said the erosion reflected some profit-taking, some nervousness in the wake of Chemical's announcement that it was hiking its prime rate, and perhaps some hedging of the new corporate issues sold during the session.

The September bond futures contract closed 11/32 higher at 99(22)/32.

In the cash market, the 30-year 8% bond was 11/32 higher, at 101-21/32 -101-25/32, to yield 7.84%.

The 7-1/2% 10-year note rose 15/32, to 101-9/32-101-13/32, to yield 7.29%.

The three-year 5-7/8% note was up 3/32, at 100-16/32-100-18/32, to yield 5.66%.

Rates on Treasury bills were lower, with the three-month bill down two basis points at 3.69%, the six-month bill off two basis points at 3.82%, and the year bill three basis points lower at 4.03%.

Fed Forex Report

The Federal Reserve Bank of New York said Friday that it sold $150 million for Japanese yen in the period from February to April.

William J. McDonough, executive vice president of the New York Fed and manager of the Fed's foreign operations, said the United States sold the $150 million in two interventions. The first action totaled $100 million and took place on February 17. The second amounted to $50 million on February 20th.

The New York Fed's foreign exchange desk intervenes in the foreign exchange markets on behalf of both the Federal Reserve and the U.S. Treasury. Mr. McDonough's report was the first official acknowledgment of U.S. authorities' foreign exchange operations for the three-month period.

Over the course of the three months, the dollar improved 2.5% versus the German mark and 6% versus the Japanese yen, Mr. McDonough said. Most of the gains occurred in the early part of the period, he added, as the economic recovery moved ahead at a quicker pace.

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