With the year less than two weeks old, the direction of interest rates has been thrown into uncertainty.
The latest statistic cast into the economic mix was the Labor Department's employment survey for December. Released Friday, the data showed the labor market to be stronger than previously believed.
Bond prices fell sharply in reaction, and interest rates jumped, reversing the market's recent course. And concerns were renewed that the Federal Reserve may itself raise rates at its monetary policy session Feb. 4-5.
"The stage is set for a battle royal in the first half of 1997, with the hawks and doves on the Federal Open Market Committee struggling over interest rates," said Ian Shepherdson, chief economist at HSBC Markets, New York.
The nation's nonfarm payroll employment rose by 262,000 last month, well above Wall Street's consensus expectation of about 200,000. The 30-year Treasury bond quickly fell 1 14/32, to 95 7/32, while its yield shot up to 6.87%, versus 6.76% late Thursday. Some ground was regained later.
The latest data confirm that the economy is growing at a consistently strong pace, said Charles Lieberman, chief economist at Chase Manhattan Corp., who had predicted a rise in payrolls of 300,000 jobs.
He estimated that the economy had expanded at a 3% annual rate in the fourth quarter and would grow at the same rate in the first quarter.
"The economy remains strong; and the labor market is growing progressively tighter because of job growth, unemployment is near 20-year lows, and there is an unambiguous acceleration in wage rates when you get beyond the volatility," he said.
"At some point, the Fed is going to have to raise interest rates," Mr. Lieberman said. He said he does not expect a hike at the February meeting, although he would not be shocked by one.
A move is more likely around midyear, he said, because employment figures have been volatile from month to month. The central bank is likely to wait for clear evidence that a tight job market is stirring higher inflation. Mr. Lieberman said he regards that as inevitable.
Others were not so sure. "We will climb out on a limb and retain our view of moderate growth and low inflation," said Bruce Steinberg, senior economist and manager of macroeconomic research at Merrill Lynch & Co.
"We don't believe the Fed will tighten at the next FOMC meeting," he said. "In our view, it would take a couple of more employment reports on this scale to impel the Fed to act, and we don't expect that to happen."
Among other things, Mr. Steinberg noted, the Bureau of Labor Statistics next month will revise upward its estimate of the size of the nation's labor force to better account for immigrants.
Assuming roughly normal labor force growth, he said, "payrolls can probably grow by 150,000 to 175,000 per month without any additional tightening in the labor market."
"Historically, a one-percentage-point rise in labor costs has led to a 0.3 percentage point rise in core inflation," he noted. "So far, the wage pickup appears too small to affect inflation."
To be sure, Mr. Steinberg said, "some further pickup in labor costs is inevitable." But he maintained that "any pickup will be small and end up eroding profit margins rather than boosting inflation."