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Massachusetts' higher unemployment rate means that more people are trying to enter the workforce, economists say. Photo: Getty Images

U.S. employers stepped up hiring in February and the jobless rate fell to a more than 6-1/2-year low of 5.5 percent, which could put pressure on the Federal Reserve to raise interest rates in June. Nonfarm payrolls increased 295,000 last month after rising 239,000 in January, the Labor Department reported Friday. The broad 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 into territory that some Fed officials consider consistent with full employment.

"The labor market is on a roll. This should ease fears at the Fed that the global downturn and sharp drop in oil prices are materially disrupting the U.S. economic outlook, and keep the Fed firmly on course for a June lift-off," says Scott Anderson, chief economist at Bank of the West in San Francisco.

The decline in the unemployment rate, however, largely reflected people dropping out of the labor force.But economists, who had expected payrolls to rise only 240,000 and the unemployment rate to fall to 5.6 percent, notes that other indicators monitored by the U.S. central bank showed a rapidly tightening labor market.


February marked the 12th straight month that employment gains have been above 200,000, the longest such run since 1994.The dollar rallied to a fresh 11-1/2-year high against a basket of currencies as traders brought forward bets on when the Fed would raise rates. However, futures markets continued to point to a first rate hike in September.

U.S. stocks and government bond prices fell.Average hourly earnings rose by three cents last month, leaving the year-on-year gain at 2 percent. That compared to a 2.2 percent rise seen in the 12 months through January.

While economists acknowledge that persistently sluggish wage growth and very benign inflation argued against the Fed pulling the trigger in June, they say tightening conditions in the labor market could force the central bank's hand.

"Even if the Fed decides to delay the lift-off in policy, it is hard to see the downward trend in unemployment not continuing," says Jeremy Lawson, chief economist at Standard Life Investments in Edinburgh, Scotland.

"Will the Fed really want short-term interest rates to be negative when the unemployment rate falls below 5 percent late this year or early next year?"

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