Fed seen hiking rates earlier as jobs gain, wages rise

By Ann Saphir

(Reuters) - Traders on Friday added to bets that the Federal Reserve will begin raising rates by mid-year after a government report showed U.S. employers added more jobs than expected last month and wages rose.

U.S. employers added the most jobs over a three-month period since 1997, the report showed. Wages rose at their fastest pace since August. With the recovery gaining steam, analysts said, the Fed may not need to keep rates at rock-bottom for much longer.

"It moves the window for the Fed (to raise rates) back to the summer and maybe even sooner," said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis. "The Fed is losing its argument that it should maintain a zero percent rate."

Futures contracts tied to the Fed's main policy rate now show that traders see a 62 percent chance that the first Fed rate hike will come in September 2015, based on CME FedWatch, which tracks rate hike expectations using its Fed funds futures contracts. They put a 47 percent probability on the chance of a July rate hike.

Before the report, traders were betting the Fed would wait until October before raising rates.

The Fed has held rates near zero since December 2008, and though in October it stopped its bond-buying stimulus program, it reiterated in January a pledge to remain "patient" on raising rates.

Fed Chair Janet Yellen said that "patient" means the public can expect the Fed to keep rates unchanged for at least the next two meetings, or through April.

(Reporting by Ann Saphir in San Francisco, Rodrigo Campos in New York, Lucia Mutikani and Jason Lange in Washington; Editing by Chizu Nomiyama and Meredith Mazzilli)