U.S. labor market flexes muscles as February payrolls soar

WASHINGTON (Reuters) - U.S. employment growth accelerated in February and the jobless rate fell to a more than 6-1/2 year low of 5.5 percent, signs that could encourage the Federal Reserve to consider hiking interest rates in June.

Nonfarm payrolls rose 295,000 last month after rising 239,000 in January, the Labor Department said on Friday. The job gains came despite disruptive weather conditions that took hold across large parts of the country in mid-February.

The decline in the unemployment rate from 5.7 percent in January took it to its lowest level since May 2008 and near what many Fed officials consider to be full employment.

"We feel the economy is in a position for the Fed to begin normalizing policy. We think it is on the path to make a rate change in June," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

The data suggested the U.S job market continued to strengthen last month, although the drop in the jobless rate largely reflected people leaving the labor force.

Economists polled by Reuters had forecast a 240,000 increase in payrolls after a previously reported 257,000 rise in January. They had forecast the jobless rate falling one-tenth of a percentage point to 5.6 percent.

The dollar rallied to a fresh 11-1/2-year high against a basket of currencies on the report, while prices for U.S. Treasury debt fell. U.S. stocks were generally trading lower.

Average hourly earnings rose by three cents last month and further gains are expected.

Wal-Mart , the world's largest retailer, announced last month it would spend more than $1 billion this year to increase pay for about 40 percent of its U.S. workforce. Other companies including TJX Cos Inc and health insurer Aetna also have announced wage increases.

Fed officials are monitoring pay closely to help determine when enough pressure has built in the jobs market to merit higher borrowing costs and keep the economy from overheating.

RATE LIFT-OFF

The closely followed employment report was released a little more than a week before the U.S. central bank's March 17-18 policy meeting. Many economists expect the Fed could signal its openness to a June interest rate lift-off by dropping a pledge to be "patient" in considering a hike.

"The Fed will almost surely move to drop 'patient' at its upcoming meeting while pushing towards raising interest rates later this year," said Dan Greenhaus, chief strategist at BTIG in New York.

The Fed has kept its key overnight lending rate near zero since December 2008. The sturdy jobs report reinforces the view that a recent slowdown in economic growth reflects temporary factors, such as weather and a now-settled labor dispute at West Coast ports.

The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, fell one-tenth of a percentage point to 62.8 percent last month.

The employment-to-population ratio held steady at a 5-1/2 year high of 59.3 percent.

A broad measure of joblessness that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment fell to 11 percent, the lowest since September 2008, from 11.3 percent in January.

Overall, private payrolls increased 288,000 last month, with construction employment rising 29,000. Manufacturing payrolls were up 8,000 and government employment jumped 7,000.

(Reporting by Lucia Mutikani; Additional reporting by Richard Leong in New York; Editing by Paul Simao)