The Election & Your Portfolio

Not paying attention to the elections and how it might affect your portfolio? Shame on you! Here’s a brief primer.

1) Healthcare.
Few issues are more contentious, but there seems to be remarkably little difference between Obama, Clinton and McCain here.

The big issue is government negotiation of drug prices for Medicare: Dems very much in favor, and got 54 Senate votes last time it was voted on in 2007; they will need 60 to break a filibuster. Right now the Dems have 51 seats, and will almost certainly pick up an extra three or four. That could put them in a position to negotiate.

Look at Humana , which has a large percentage of the market for Medicare subsidies and reported excellent earnings the other day. Dems say it’s time to reduce the Medicare subsidy. A bill to reduce Medicare subsidies got through the House. Again, the focus will be on the Senate.

What would a President McCain do? Sounds like he would support some type of price controls on drugs, and also some support for reimportation of prescription drugs.

That’s another hot-button healthcare issue: reimportation of drugs, from Canada and elsewhere. This is probably a done deal, the question is would reimportation come just from Canada, or other countries as well? Canada’s price differences with ours are minimal, but it could be significant elsewhere. But this raises questions of quality control.

2) Tobacco.
If Dems win, they will certainly attempt to raise tobacco taxes to fund healthcare. This of course creates the bizarre situation that healthcare will be partly dependent on the continuation of smoking, but I digress.

One side story here is Altria. In 2001 Altria made a strategic decision to be regulated by the FDA, under the theory that it would help the public image and provide other advantages. It fought for a bill to regulate the tobacco industry. There are currently 214 sponsors for the bill in the House, and it appears to have bipartisan support in the House and Senate.

This regulatory bill could be signed into law under a Democratic sweep.

Why would Altria do this? First, it would solidify their 50 percent market share. Why?

Because it would limited market opportunities of competitors and place limits on advertising. Essentially, it consolidates the competition. RJ Reynolds will also probably merge with smokeless tobacco companies.

Second, it would limit legal liability — many of the lawsuits would be minimized.

3) Energy.
The Dems have $16 billion in solar and wind subsidies, they want to fund it by raising taxes on oil companies and getting rid of tax breaks like the Domestic Activities Production Tax Credit (if you produce 100 percent of your output in the U.S., you pay a lower tax — Dems want to eliminate this for oil companies).

Would a President McCain sign a tax increase on oil companies as part of a larger energy bill? I think he would.

4) Fannie Mae / Freddie Mac.
This is an old and tired story. Yes, investment portfolio limits will go up if the Democrats come to power.

5) Trade/Protectionism.
Dems are not going to put up tarriffs and have a trade war, they will try to enforce existing trade agreements. For example, the WTO has rules, one of which is the government cannot subsidize their domestic manufacturers.

The labor unions will be pushing to clamp down on that activity abroad, particularly in China. China has been a blatant violator: look at what is happening with Rio Tinto, where the Chinese government has been subsidizing Aluminum Corp. of China’s purchase of 9 percent of Rio Tinto’s stock in hopes of acting as a spoiler to the BHP Billiton bid for Rio Tinto.

The real beneficiary will be U.S. Steel, because their production is here.

US weekly jobless claims total 276,000 vs 279,000 estimate

The number of Americans filing new claims for unemployment benefits fell slightly more than expected last week, pointing to labor market resilience despite moderate economic growth.

Initial claims for state unemployment benefits dropped 8,000 to a seasonally adjusted 276,000 for the week ended May 30, the Labor Department said on Thursday.

Claims for the prior week were revised to show 2,000 more applications received than previously reported.

It was the 13th straight week that claims held below the 300,000 threshold, which is usually associated with a strengthening labor market.

Economists polled by Reuters had forecast claims falling last week to 279,000. Last week’s claims data included the Memorial Day holiday, but a Labor Department analyst said that had not had an impact on the data.

The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, increased 2,750 to 274,750 last week.

The tightening jobs market underscores the economy’s solid fundamentals even though growth is struggling to regain steam after output contracted in the first quarter.

The economy got off to slow start in the second quarter in part because a strong dollar and spending cuts in the energy sector constrained manufacturing activity.

There are, however, signs of some pick-up, with data this week showing a surge in automobile sales in May and gains in factory activity last month for the first time since November. In addition, the trade deficit narrowed sharply in April and construction spending hit its highest level since November 2008.

Last week’s claims report has no bearing on May’s employment report, which is due for release on Friday, as it falls outside the survey period.

Still, the claims data suggest another month of solid job growth. According to a Reuters survey of economists, nonfarm payrolls likely increased 225,000 last month after rising 223,000 in April.

Thursday’s claims report showed the number of people still receiving benefits after an initial week of aid fell 30,000 to 2.20 million in the week ended May 23. That was the lowest since November 2000.

IMF warns US Federal Reserve should delay rate hike until 2016

The U.S. Federal Reserve should delay a rate hike until the first half of 2016 until there are signs of a pickup in wages and inflation, the International Monetary Fund said in its annual assessment of the economy on Thursday.

The fund’s report comes amid signs that some rate setters at the U.S. central bank are also pushing for rate hikes to be delayed until there are clearer signs of a sustained recovery. U.S. data has been mixed and the economy shrank 0.7 percent in the first quarter.

“Based on the mission’s macroeconomic forecast, and barring upside surprises to growth and inflation, this would put lift-off into the first half of 2016,” the fund said.

Fed chair Janet Yellen has insisted the economy remains on track and that a rate rise this year is on the cards, although others including Fed governor Lael Brainard, viewed as a centrist on the rate-setting committee, have raised concerns over growth.

The fund forecast that the Fed’s favored measure of inflation, the personal consumption expenditures (PCE) reading, would hit the central bank’s 2 percent target only in mid-2017.

“A later lift-off could imply a faster pace of rate increases following lift-off and may create a modest overshooting of inflation above the Fed’s medium-term goal (perhaps up toward 2.5 percent),” the Fund said.

“However, deferring rate increases would provide valuable insurance against the risk of disinflation, policy reversal, and ending back at zero policy rates.”

The prolonged period of zero interest rates has prompted a hunt for yield in U.S. assets, although the IMF said that at present this had created “pockets of vulnerabilities” rather than “broad-based excesses.”

It warned that a migration of financial intermediation to non-banks which are more lightly regulated and the potential for insufficient liquidity in a range of fixed income markets could lead to “abrupt” moves in market pricing.

It called on all the agencies involved in the Financial Stability Oversight Committee, a grouping of regulators, the central bank and government agencies, to have specific financial stability mandates.

“While coordination between agencies has clearly improved, there is a need for greater clarity on the roles and responsibilities for system-wide crisis preparedness and management under the FSOC umbrella.”

Texas policies can work anywhere in US

“What we did in Texas will work anywhere,” former Gov. Rick Perry said Friday, a day after he announced his second bid for the GOP presidential nomination.

“This isn’t because Texas is somehow special and nobody else is,” Perry said on CNBC’s “Squawk Box.”

He said Texas’ success includes tax policy, regulatory policy and a legal environment that doesn’t allow for excessive lawsuits. Lowering the U.S. corporate tax rate by 10 percent will raise middle-level wages by 5 to 10 percent, he said.

“Every blue collar worker in the country ought to be saying, ‘Perry, I’m going to vote for you if you’re going to do that,'” he said.

He said another factor in Texas’s success is an accountable school policy.

“If you are a Hispanic in Texas, you live in a state that has the highest graduation rate in America. If you are African-American, you live in a state that has the highest graduation rate in America,” he said.

“You want to send a message to people—we care about you, we care about your family? Graduate them from high school because that puts them on a track.”

Perry said Hispanics in Texas are nine times more likely to be employed and 2.5 times more likely to own a small business.

“I’d like to see that all across this country, and it can happen all across this country,” he said. “We’re just a few good policy decisions—and I think a leadership change at the top—away from that happening.”

Big data is creating big career opportunities

Mariah Walton leans forward and daubs a canvas with paint. At home, she works in oils, slowly building the paintings she has been doing since childhood. At work, she believes the skills that make her an artist, make her a better data scientist at LinkedIn.

“I’m a visual learner. I actually see things in my head when I look at problems. That translates really obviously into art,” said the 29-year-old. “But it’s also how I do my data analysis.”

People like Walton are in demand these days. A 2015 survey by global recruiting consultant Harvey Nash found that topping the wish list for chief information officers were employees with the skills to mine all the big data the digital revolution has created, and to unearth the trends and solutions these billions of text files may contain.

Mariah Walton, LinkedIn data scientist

“Big data is becoming an effective basis of competition in pretty much every industry,” said Michael Chui, a partner at the McKinsey Global Institute. “Whether you are looking at health care and the ability to provide personalized medicine, or you look at logistics or operations that are trying to improve the efficiency of the supply chain.”

Still, with the exception of a few notable firms like Amazon and Google, Chui said many companies have not benefited as much as expected from big data’s insights, in large part because there are not enough people with the deep analytical skills needed to mine the data.

Because of this, Chui stands by a 2011 report from McKinsey predicting there could be a shortage of between 140,000 and 190,000 of these workers by 2018, as industries well beyond tech look for workers who can help them improve their companies by utilizing information gleaned from big data.

LinkedIn’s head of data recruiting, Sherry Shah, describes the job market for these candidates as being “very hot right now” as the data field is “very sexy.”

“So its superhard to find the right talent,” she said.

Shah said the online networking site is looking to hire more than 100 data scientists this year, a 50 percent increase from 2014. And because Mountain View, California-based LinkedIn is not the only Silicon Valley company vying for these potential employees’ talents, she said, “there is always a bidding war.”

Shah would not say what these data scientists are paid, but noted that a person with a Ph.D. will command a six-figure salary, while the others are paid “competitively.”

To find the right candidates in this competitive market, Shah said LinkedIn searches its own website, recruits at tech talks and conferences, and looks beyond the traditional pool of applicants for these jobs.

Shah said while 80 to 90 percent have a computer science background, the company also looks for employees in industries like biomedical or political science. Both industries, she noted, use a lot of data so the workers would replicate some of the work they did in their prior jobs in the tasks they do at LinkedIn, using different data.

Thirty-one-year-old Jerrod Lowmaster is one of those recruits. He received his undergraduate degree in Near Eastern languages and civilization from the University of Chicago and a master’s in international economics from Johns Hopkins.

“This is kind of my third career,” said Lowmaster of his role as a data scientist for LinkedIn’s growth group, which is focused on expanding the company’s user base.

Now settled in San Francisco with his girlfriend and his dog, Lowmaster worked in intelligence for the NSA and then on a renewable energy project before joining LinkedIn.

Jerrod Lowmaster, LinkedIn data scientist

“The one common thread I think that really unifies those jobs is I was in a place that had a great deal of data, and it really wasn’t structured and there were interesting and critically important business questions we wanted to ask the data,” he said.

Lowmaster added all the jobs require finding the right techniques and ways to look at the data, to give executives or decision-makers the information they need to decide what to do.

Self-taught in computer languages commonly used in data analysis, Python and SQL, Lowmaster believes the most important skills a future data scientist can bring to the table, beyond the requisite technical chops, are an inquisitive mind and to be customer oriented.

McKinsey’s Chui said future data scientists also need to be skilled in statistics, and to be able to tell stories with data, to make it understandable to a variety of people.

That is what Walton does in her role on the business analytics team. She works with LinkedIn’s sales force, looking at why certain members click on certain ads. The sales team can then bring this information to the company’s advertisers so they can be more effective in targeting the right audience on LinkedIn’s site.

“We have millions of visitors to the site each day, and we are logging every page view and click,” said said. “I am trying to understand in aggregate what these different people are doing.”

Read MoreJobs for drones are set to take off

She also looks at the data in smaller slices, segregating it by a member’s job title or location, all in an effort to try to figure out why unconventional audiences are interested in certain ads and why.

The LinkedIn building in Mountain View, Calif.

A chemical engineer by training, like Lowmaster, Walton’s path to LinkedIn was a circuitous one. After earning her undergraduate degree at the Rose-Hulman Institute of Technology, she moved to Colorado where received her master’s in climate science from the University of Colorado at Boulder. Deciding she did not want to teach, she joined the solar industry, helping a California-based company maintain its meteorology stations. The firm went bankrupt, so she moved back to Colorado before returning to California about a year later.

As for her job at LinkedIn, where she has been since April of last year, Walton said she loves it. Animated and enthusiastic, she said while coding is a large component of her job, her favorite part is seeing a project through from beginning to end.

“A large part of my job is managing a project, which means I get to talk to a lot of different teams,” said Walton. “I get to see a lot of different people come together and I get to see a final product.”

A fitting observation, and job, for someone who has been recording what she sees since she was a child.

Strong jobs report says rate hikes are coming

May’s strong 280,000 employment gain reaffirmed market expectations that September may be the month when the Fed raises interest rates for the first time in nine years.

If the solid jobs report is confirmed by other economic data, it suggests that the second quarter may not be quite as sluggish as some fear, and the Fed, therefore, may be more willing to move to end the era of zero interest rates.

“It re-establishes momentum and keeps them on track for a September rate hike. That’s the bottom line,” said Deutsche Bank’s chief U.S. economist, Joseph LaVorgna. He had expected 275,000 nonfarm payrolls while Wall Street’s consensus was for just 225,000 jobs.

The report also showed a slightly better-than-expected 0.3 percent increase in average hourly wages in May, taken by some traders as an early sign that wage growth and inflation may finally be picking up—a necessary ingredient for rate hikes.

After a week of wild swings, bond yields immediately ripped higher with the 10-year again reaching the 2.42 percent level, revisiting the eight-month high hit for the first time Thursday. The two-year note yield was at the highest level of the year, at around 0.74 percent. The two-year is the part of the curve most reflective of rate increase expectations.

The dollar index gained, rising 1.3 percent on the day to 96.66. Stocks initially sold off but moved higher as financial shares gained on the expectations that higher interest rates would boost their earnings. Utilities, a popular dividend play for a low-yield environment, fell by 1 percent.

Wall Street is divided on when the Fed will move, with a group expecting September, another December and some do not believe the central bank will hike until next year. This week, two Fed governors warned about economic weakness, raising speculation the Fed could hold off until later in the year or next year.

Mesirow Financial’s chief economist, Diane Swonk, said she had been on the fence before Friday’s jobs report and was thinking of changing her forecast for a rate hike to December from September because of economic weakness.

“This restarts the clock on September,” said Swonk. The jobs report also included positive revisions to March and April, adding 32,000 jobs.

“It’s good in so many ways. It shows signs of healing,” said Swonk. “The composition of gains was very beneficial to new grads, and leisure was higher. We actually had a snap back on hospitality that confirms consumers are spending. … It affirms some of it was transitory and affirms consumers are going to take vacations.”

GDP in the first quarter contracted by 0.7 percent and economists have been paring back their optimistic views for a second-quarter rebound.

They now expect growth of about 2.5 percent, but some data recently have shown a pickup including a better export number this week, a higher CPI print and strong auto sales

“It keeps the Fed on track for tightening this year, not June, probably not September but this year. You’re still not back to where you were before the first-quarter weakness,” said LPL Financial economist and strategist John Canally.

“The average for the last three months was 207,000,” said Canally. Job growth had been well over 250,000. The unemployment rate did rise to 5.5 percent from a near seven-year low of 5.4 percent but economists said that should reverse and reflects an increase in participation in the labor force.

Swonk said even if the Fed does raise rates in September, it will likely proceed slowly and not continue to raise them at each meeting.

“This is all very good news for a Fed that really wants to achieve liftoff this year,” said Swonk. “Financial markets need to adjust to that. (Fed Chair Janet) Yellen has made it clear she needed some healing, not a lot of healing, in the labor market. The last piece is going to be the PCE.”

The PCE—personal consumption expenditure inflation data—is the Fed’s preferred inflation measure. Swonk said it may be about to turn higher since the inflation reading was depressed by lower health-care costs, and insurance expenditures are now rising.

LaVorgna said while the data appear to be improving, the Fed’s decision on rate hikes is complicated, and the market’s very reaction to the Fed may become a problem.

“There is a possibility we have a significant rise in yield accompanied by a relatively painful correction in equities and that could actually pause the Fed. It’s impossible for analysts to model the Fed reaction function because they’re looking at things that mean different things to even the people on the committee,” LaVorgna said.

As for rising bond yields, John Briggs, rate strategist at RBS, said the yield rise on the day of the jobs report typically does not continue.

“Yields have come a long way and the market is starting to look oversold,” he said. “I wouldn’t stand in the way of it, but wouldn’t start selling here. … We had a very quick move very quickly. I would not be surprised if we started to trade sideways.”

Briggs said if the 10-year yield does close above 2.40, it could be on a path toward 2.60 percent.

What’s the real unemployment rate?

The U.S. Labor Department said Friday that the unemployment rate was 5.5 percent in May—but does that rate tell the real story?

Read MoreUS jobs data glitter may not be gold

A number of economists look past the “main” unemployment rate to a different figure the Bureau of Labor Statistics calls “U-6,” which it defines as “total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers.”

In other words, the unemployed, the underemployed and the discouraged—a rate that still remains high.

The U-6 rate was flat in May at 10.8 percent. It was the first time since early 2014 that the rate did not change from one month to the next.

The trend in U-6 has been somewhat more volatile than in the main unemployment rate as well. The U-6 rate is down 130 basis points over the last year, versus a 80 basis point decline in the main rate (also known as U-3).

The U-6 rate has held firm in the double digits since June 2008. It most recently peaked at 17.1 percent in April 2010.

Shockingly weak productivity haunts US job gains

“You can see the computer age everywhere but in the productivity statistics,” the economist Robert Solow famously quipped in 1987.

Today, Solow’s paradox is back.

U.S. productivity, or output per worker hour, just registered another dismal performance. In the first quarter, it was up a bare 0.3 percent from a year earlier.

That has unfortunately become the norm. Productivity has risen just 0.6 percent on average over the past five years.

A factory worker assembles transmission components for Chrysler vehicles at the company's Tipton Transmission Plant in Tipton, Indiana.

A factory worker assembles transmission components for Chrysler vehicles at the company’s Tipton Transmission Plant in Tipton, Indiana.

“This is the worst five-year run for productivity since the early 1980s, and the worst five-year performance on record outside of a recession,” J.P. Morgan economists observed in a client note.

Clearly, there is a problem. The trouble is determining what exactly it is—and what, if anything, to do about it.

Not So Fast

Economists at Goldman, Sachs & Co., for instance, suspect it’s the numbers themselves that might be the problem.

They argue precisely what Silicon Valley has been crowing for years now: that software is eating the world.

The “measured price of computer hardware has plunged by 91.5 percent since 1995,” they note, but “measured software prices [have] only edged down slightly over the past two decades.”

This is important because America’s information technology “center of gravity” has shifted “away from hardware, to software and digital,” whose products now make up more than half of the output and market valuation of the sector, says Goldman.

It may be well more than half, actually, given that Apple—America’s biggest tech company—is still included as hardware in the consumer price index, despite selling a growing mix of software and digital products.

The price of these products matters greatly for gross domestic product, or GDP, which is reported in real, or inflation-adjusted, terms. The lower the price for a given product amid steady demand, therefore, the bigger boost that delivers to real GDP growth.

In other words, if hardware’s falling prices tend to boost real GDP, software and digital content’s flat prices, especially as those products grow as a proportion of tech spending, “will result in a spurious slowdown in real GDP growth,” Goldman observes.

If software and digital prices were instead falling at the 20-year average pace seen on the hardware side of about 5 percent a year, that would mean an understatement to GDP growth of about 0.2 percentage-points per year.

Throw in another 0.75 percentage-points of “consumer surplus” from new software and digital products that is otherwise un-captured in the data, as Erik Brynjolfsson and JooHee Oh have estimated, and “we walk away persuaded by the notion that productivity mismeasurement could be a significant issue,” says Goldman.

If this argument is correct, it means real GDP growth in this country may be much healthier than thought, that the standard of living in fact may be growing as much as in the past, that true inflation is actually lower than measured inflation, and that gauges like employment—which has shown steady improvement–may be more reliable.

In sum, “it would be better for Fed officials to delay monetary tightening until 2016,” Goldman argues.

Permanently Lower?

That, however, is a far more upbeat assessment than many others are putting forth.

“Welcome to life in the slow lane,” is how J.P. Morgan chief U.S. economist Michael Feroli put it recently in a client note.

He was among the first outside academia to argue America’s growth rate has fallen for good. Productivity rates being this low, plus labor force growth of about 0.5 percent a year, together point to trend growth of only about 1 percent for the U.S. economy, by his reckoning.

That means America’s 2.4 percent average GDP growth over the past two years has perhaps only been possible because of “the massive using-up of slack labor market resources.” Catch-up, in other words, from the financial crisis and deep recession.

Ethan Harris, head of North American Economics for Bank of America Merrill Lynch, said companies may even “have gotten a little ahead of themselves in hiring.” Any slowdown in jobs growth from here would reinforce that conclusion.

If in fact America’s potential growth rate remains this weak, it means, as J.P. Morgan’s market team observed, earlier, perhaps more frequent recessions, and higher inflation. And that is more likely to cause lower interest rates over time, as opposed to higher ones.

“Lower productivity growth ultimately means lower interest rates,” the firm said, “as the latter should reflect the return on capital.”

It also puts high stock-market valuations at risk and is a negative for commodities and for emerging markets, whose productivity growth has been even weaker than that of developed markets, but is typically bought on the premise of much higher growth.

The risk, in the U.S. and overseas, is a vicious negative feedback loop: “Low productivity is brought about by low capital spending, while that, in turn, lowers productivity again.”

Missing Investment

This issue of too-low capital investment already has many concerned.

“The labor productivity trend has been crushed by lack of investment leading to an unprecedented decline in capital intensity,” said Morgan Stanley economist Ted Wieseman.

The ratio of capital services per worker hour, he observed in a client note, fell in 2011, 2012, and 2013; “the first run of three declines on record.”

Likely, it fell again last year, he said, as net investment as a share of GDP remained depressed while hours worked rose 3.5 percent, “and it’s probably falling still so far in 2015” for the same reason.

This marks a major downshift from America’s super-productive years of roughly 1995-2005—the same boom era during which Solow’s paradox was thought to be ancient history.

“The contribution of capital intensity to labor productivity growth has thus turned negative in the post-recession period, after adding 1.0 percentage-point a year from 2000 to 2007, and 1.2 percentage-points a year from 1995 to 2000,” Wieseman observed.

Ethan Harris of BAML agrees. “Capital deepening has stopped in the last eight years or so in the U.S.,” he said.

Why? The theories range from blaming “zombie companies” propped up by low interest rates to investors rewarding other uses of corporate cash, like buying back stock and paying dividends, instead of investment.

Plus, contrary to the “start-up nation” image projected by Silicon Valley, there is also a general lack of new business formation, as everyone from academics to Wells Fargo chairman and chief executive officer John Stumpf recently told CNBC.

Robert Gordon, a professor at Northwestern University, has been arguing for years that America’s growth rate will remain depressed. “The digital electronics revolution has begun to encounter diminishing returns,” he said at a recent economics confab, and so we are witnessing “a decline in the ‘dynamism’ of the economy as measured by the rate of creation of new firms.”

Put simply, Gordon thinks the returns from the digital revolution have been and will continue to be far lower than from prior industrial revolutions.

Entitlement Nation

Finally, there may also be a “crowding-out” effect.

“The cause currently is pretty clear,” said former Federal Reserve chairman Alan Greenspan in an interview.

The growth in America’s entitlement programs—chiefly, Medicare, Medicaid, and Social Security—today soaks up a far larger share of the gross savings available to fund productivity-providing investment.

The sum of entitlement payments was less than 5 percent of GDP back in the mid-1960s, he notes. Today, that figure is approaching 15 percent.

Other factors ranging from the digital revolution to changes to America’s supply chain, increasingly a “just-in-time” delivery system, may contribute, said Greenspan, but they aren’t key to the slowdown story.

And with entitlements if anything continuing to grow as a portion of the U.S. economy, on the question of whether Greenspan today sees—like the “Maestro” famously did back in the mid-1990s—any signs of productivity picking up?

“I’ve seen no evidence of it,” he said.

Fed's Dudley: Rate hike appropriate later this year

A Federal Reserve interest rate hike seems appropriate later this year despite muted growth in the second quarter, a top Fed official said Friday.

The timing of a move to hike rates depends largely on economic outlook, said William Dudley, president of the New York Federal Reserve, in prepared remarks Friday afternoon. He added that he expects U.S. growth to pick up, saying he has greater confidence inflation is moving back to the central bank’s 2 percent target.

Read MoreFed survey: ‘Generally optimistic’ about growth

Dudley—a voting member of the Fed’s policy making committee—noted that he sees a shallow increase for rates. “Turbulence” in markets seems likely when the central increases rates, he said. (Tweet this)

William Dudley, president and chief executive officer of the Federal Reserve Bank of New York.

William Dudley, president and chief executive officer of the Federal Reserve Bank of New York.

His remarks came on the heels of the government’s monthly jobs report on Friday morning. The U.S. economy added a better-than-expected 280,000 jobs in May.

Wages rose 8 cents an hour, equating to an annualized increase of 2.3 percent.

The job market still has “some ways to go,” Dudley said. Wage gains are higher than in recent years, and a tightening labor market could eventually lead to more progress on wages, he noted.

The central bank’s policy making committee has repeatedly stressed that a move to hike interest rates would depend on economic data.

Dudley’s comments follow Fed Governor Daniel Tarullo’s assertions on Thursday that second-quarter data indicate the U.S. economy has lost momentum. Earlier this week, Governor Lael Brainaird also said the economy has yet to show signs of a rebound after a sluggish start to the year.

Read MoreCramer: Wait till September for rate hike

The government said the U.S. economy contracted at a 0.7 percent annual rate in the first quarter.

Nonfarm payrolls total 280,000; unemployment rate at 5.5%

The U.S. economy created 280,000 jobs in May, better than expected and likely confirming hopes that growth is back on track after a slow start to the year.

The headline unemployment rate increased slightly to 5.5 percent as the labor force participation rate ticked higher to 62.9 percent. ( Tweet This ) A separate measure that counts those working part time for economic reasons and the unemployed who have not looked for work in the past month held steady at 10.8 percent.

Wages also showed growth, rising 8 cents an hour, equating to an annualized increase of 2.3 percent.

Economists had been expecting a gain of 225,000 positions and the unemployment rate holding steady at 5.4 percent.

“Today’s report showed the U.S. labor market has tremendous momentum. All those factors that parked a weak jobs number in March were short-term,” said Andrew Chamberlain, chief economist at job search site Glassdoor. “All those factors are looking more like a late-winter sniffle than a lingering illness.”

The jobs numbers are critical in that they will go a long way toward determining policy from the Federal Reserve. The hot jobs report sent U.S. government bond yields surging as the wage increase indicates inflation is pushing toward the Fed’s target. Stock futures also indicated a lower open for Wall Street, though the move in the equity market was far less pronounced than in bonds.

After keeping short-term interest rates near zero for 6½ years, the U.S. central bank is looking for a liftoff point that would be confirmed not only by job creation but also by wage growth, which would indicate inflation is on a positive trajectory.

“I think (the jobs number) puts September more firmly on track” for a rate hike, said Jim Caron, portfolio manager of global fixed income at Morgan Stanley Investment Management. “As of yesterday it was probably closer to a 50-50 bet. Today, I think it’s more in lines of a 75 percent probability. It moves the needle in terms of expectations and gives air cover to the Fed.”

Trader bets on the date for a rate hike pushed it forward this week, with the latest trends showing a 33 percent chance of a September hike (up from 26 percent earlier in the week), a 52 percent chance in October (from 44 percent) and a 70 percent likelihood for December (from 61 percent).

While many market participants expect a rate increase this year, the Fed got a stunning jolt Thursday from the International Monetary Fund chief Christine Lagarde, who took the unprecedented step of advising the Fed to wait until 2016 until the inflation picture is clearer.

“This number effectively flies in the face of what the IMF recommended yesterday that the Fed take a pause,” Caron said.

Service industries led the way for May, adding 63,000 positions, while leisure and hospitality grew by 57,000. Health care increased by 47,000, retail added 31,000 and construction moved higher by 17,000. Mining was a dark spot on the report, contracting by 17,000, bringing the decline to 68,000 in 2015.

The average work week was unchanged at 34.5 hours.

The number of full-time workers grew by 630,000, while the part-time rolls fell by 232,000.

Previous months showed minor changes, with March’s disappointing count getting pushed higher to 119,000 from 85,000 and April edging lower from 223,000 to 221,000.

“Overall, at this stage this evident strength in the labor market probably isn’t enough to persuade the Fed to hike rates by July, but it definitely makes a rate cut by September probable,” said Paul Ashworth, chief U.S. economist at Capital Economics. “Only 24 hours later, the IMF’s suggestion that the Fed should wait until 2016 looks very dated.”