Job Growth Posts Large Gain in June; Rate Holds

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A help wanted sign is placed in the window of Veronica M clothing store in Pasadena, California.

U.S. job growth accelerated in June thanks to a big jump in hospitality and service workers, news that is likely to trigger more debate about how aggressively the Federal Reserve will begin pulling back on monetary easing.

Unemployment steadied at 7.6 percent for the month, as nonfarm payrolls grew by 195,000, according to a closely watched Labor Department report Friday. Economists expected 165,000 more jobs and a decline in the unemployment rate to 7.5 percent.

Big economic reports such as the nonfarm payrolls data are viewed nowadays primarily through the prism of how they will affect the Fed's zero interest rate policy and its $85 billion a month in bond buying.

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The market is expecting the central bank to begin withdrawing some quantitative easing support, but the question is in the timing and degree.

"The taper is on," said Kathy Jones, fixed income strategist at Charles Schwab. "This is the last payroll report the Fed will see before their meeting at the end of July. With the upward revisions to the previous couple of months, it soldifies the idea that they will announce some tapering, probably in September."

A statement from Fed Chairman Ben Bernanke after the June meeting that the bond-buying could wind down completely in 2014 rattled markets.

He qualified the statement by saying it was data-dependent, so the payrolls report likely will feed expectations that the Fed at least will begin to scale back its purchases.

Revisions pushed previous months' reports considerably higher: April's tally rose 50,000 to 199,000, while the May count grew 20,000 to 195,000.

"While we still think October is most likely when the Fed will announce tapering, this report means an increased risk of an earlier taper than we anticipate," said Tom Porcelli, chief U.S. economist at RBC Capital Markets.

Stock got a nice bump at the open, though earlier futures trading indicated that the market would post upwards of a 1 percent gain. Treasury yields jumped to two-year highs and the dollar declined against the euro.

The numbers provided a mixed bag of news: While the actual employment level grew by 160,000, the unemployment ranks increased as well, by 17,000.

Those working part-time for economic reasons also jumped, growing 322,000 for the month.

That pushed a more encompassing count of unemployment that includes discouraged and underemployed from 13.8 percent to 14.3 percent.

Moreover, the quality of jobs was weak.

The bulk of the gains—75,000—came in the hospitality industry of bartending and waiters.

Professional and business services was the second-best growth area, adding 53,000 and retail grew 37,000.

Manufacturing jobs posted a decline of 6,000 for the month.

"It's so hard. Unless you know somebody you can't get a job," said Sharon MacGregor, 43, of Patterson, N.J.

MacGregor was laid off a year ago from her job at a medical education company and has struggled since to find a job that can help her make ends meet.

"Now that I've been unemployed for more than six months, I don't feel like I'm even being considered," she said. "Pay is so low. I know we're not supposed to be choosy, but you have to live."

The average duration of unemployment actually fell in June but remained elevated at 35.6 weeks.

While the numbers provided confirmation that employment gains continued pretty much apace with the past year or so, the Fed's targeted growth level remains elusive. The central bank has pegged a 6.5 percent unemployment rate and 2.5 percent inflation as benchmarks to hit before it will start raising its target funds rate.

"We can expect the Fed to continue providing hints of tapering, while maintaining status quo with the current QE program," said Todd Schoenberger, managing partner at LandColt Capital. "Overall, this report is remarkably bullish for stocks."

Stock market investors had been eagerly awaiting the number not only for indications of labor market strength but also as a gauge for when the central bank's historically extreme easing policy might start to wane.

With earnings and economic growth modest, the market has relied on the Fed's liquidity injections to continue a rally that has seen the S&P 500 gain more than 13 percent in 2013.

June did see a marked increase in wages, with hourly earnings rising 10 cents to $24.01, while the average work week was unchanged at 34.5 hours.

(Get the government's nonfarm payrolls report here.)

_ By CNBC's Jeff Cox. Follow him @JeffCoxCNBCcom on Twitter.