By Howard Schneider and Ann Saphir
CHICAGO/PALO ALTO, California (Reuters) - Federal Reserve officials appear on track to cut interest rates this month after data showed the U.S. labor market remained strong but continued to cool in November, even as debate emerged over a possible pause to rate cuts in the new year.
U.S. employers added 227,000 jobs last month, a rebound from a hurricane-impacted slowdown in October, but the unemployment rate ticked up to 4.2%, the Labor Department's monthly employment report showed on Friday.
Over the last half-year average monthly job gains are below 150,000, short of what some policymakers feel is needed to provide enough work to match a growing population, but nothing like the collapse Fed policymakers worried could happen when they began cutting interest rates a few months ago.
A number of Fed policymakers speaking on Friday said they saw rates continuing to come down, while injecting a note of caution on the pace.
San Francisco Fed President Mary Daly said the fresh figures show the labor market is in a good position. And while she indicated no discomfort with another rate cut this month, she said that once the policy rate is closer to where it will settle, she would take "a more thoughtful and cautious approach" on further rate cuts. Daly has previously said she views 3% as where short-term borrowing costs may need to end up.
Chicago Fed President Austan Goolsbee also said he expects that by next year "rates are going to be a fair bit lower than where they are today," with the Fed feeling its way to a stopping point for rate cuts.
Beth Hammack, in her first major policy speech since taking the helm of the Cleveland Fed in August, said she too feels rates need to come down over time, but that given still-elevated inflation and a healthy labor market, "we are at or near the point where it makes sense to slow the pace of rate reductions."
Traders after the jobs data put the probability of a rate cut at the Fed's Dec. 17-18 policy meeting at 85%, up from less than 70% before the release of the report, and added to bets that short-term borrowing costs will drop another 75 basis points next year - a slower pace than Fed officials anticipated in a September set of economic projections.
Those projections will be updated at the December meeting.
A quarter-percentage-point reduction this month would bring the Fed's policy rate to the 4.25%-4.50% range, a full percentage point below where it was in September when the central bank began its easing cycle.
"It's not exactly a wonderful economy, but it's also an economy that doesn't seem to be decelerating as sharply as everyone expected a few months ago," TD Securities analyst Gennadiy Goldberg said, citing the average payroll growth of about 150,000 jobs in recent months. "The Fed can safely deliver another rate cut in December and then maybe communicate a possible pause coming as soon as the January meeting."
Fed Governor Christopher Waller at the start of this week said he was "leaning towards" a rate cut but would reserve final judgment to review the latest jobs numbers as well as inflation data due next week.
'PROCEED CAUTIOUSLY'
On Wednesday, Fed Chair Jerome Powell repeated his prior comments that the central bank could be careful in managing the endgame of its roughly three-year fight against inflation.
Powell's caution may come more into play next year, with many analysts expecting the Fed to pause the easing after delivering a cut on Dec. 18.
At least one of the Fed chief's colleagues may prefer a nearer-term breather.
"I continue to see greater risks to the price-stability side of our mandate, especially when the labor market continues to be near full employment," Fed Governor Michelle Bowman told the Missouri Bankers Association Executive Management Conference. "I would prefer that we proceed cautiously and gradually in lowering the policy rate, as inflation remains elevated."