(Reuters) - Federal Reserve policymakers will probably leave interest rates unchanged when they meet later this month, but keep the door open to a rate hike in July, after a government report on Friday showed employment surged in May, but pay gains cooled.
Traders now see about a one-in-three chance that the Fed will deliver an 11th straight rate increase at its June 13-14 meeting, up from about one-in-four before the Labor Department report, which showed employers added 339,000 jobs in May, far more than the 190,000 economists had expected.
Average hourly earnings, however, gained 4.3% from a year earlier, down from a 4.4% increase in April, and the unemployment rate rose to 3.7% from 3.4%, both signs that heat may be coming out of the labor market.
"That is a softening effect and is this the mythical soft landing? Looks like that," said Kim Forrest, chief investment officer at Bokeh Capital Partners. "This low wage inflation number is very good news for those of us who believe the Fed should pause."
Still, the strong employment gains kept alive anticipation in financial markets for the Fed to lift its benchmark rate another quarter point, to the 5.25%-5.5% range, by July.
Traders see that outcome about twice as likely as a continued hold, although there is plenty more data between now and then that could sway those bets one way or another.