Fed's Yellen faces battle in 2016 after getting all clear for Dec hike

By Jason Lange and Lindsay Dunsmuir

WASHINGTON (Reuters) - Federal Reserve Chair Janet Yellen has the clear signs she wanted of labor market healing to push ahead with the first U.S. rate rise in a decade in December, but may have a tougher time selling further hikes to a skeptical board.

Yellen's hand against potential dissent at the Dec. 15-16 policy meeting was strengthened by Labor Department data on Friday that showed employers hired 211,000 people in November while even greater numbers joined the workforce. [nL1N13S24J]

Fed funds futures contracts imply a 79-percent chance that the Fed will end seven years of near-zero interest rates when it wraps up its December meeting and about even odds of a second rate hike by March.

Beyond that the picture is more mixed. Interest rate futures maturing in the second half of next year are rising slightly, showing traders are wagering the Fed will manage no more than two further hikes before the end of next year. [nL1N13T0W2]

"You have an open debate between doves and hawks as to what the pace of increases should look like," said Art Hogan, chief market strategist at Wunderlich Securities in New York, referring to the divisions drawn within the Fed over readiness to tighten policy.

The Fed has appeared gun shy in raising rates twice already this year, in June and September.

MIXED MESSAGES

The Fed's policymakers hold very different views of where the central bank's benchmark rate will end next year, ranging from less than zero to 3 percent, according to projections released in September that were based on their views of appropriate policy. The median outlook was for four quarter-point hikes next year, while their views of the long-term normal level range from between 3 percent and 4 percent.

Worryingly for a consensus-seeking Yellen, it is not just traditional "doves" such as Governor Lael Brainard who are questioning the pace of rate rises. Even some of the hawks, who would typically worry more about inflation risks than weak economic growth, are weighing a possibility that they may face a long spell of sub-par growth and low inflation.

Yellen said this week that the process of rate increases could be gradual but has yet to spell out what gradual means.

One driver for the pace of hikes will be whether inflation picks up next year, and Friday's data suggested workers might not be getting big enough raises for businesses to hike prices much.

Average hourly earnings rose 2.3 percent in November from a year earlier, down from 2.5 percent in October. Without more inflationary pressures, policymakers likely want to raise rates more gradually.

Friday's jobs report also highlighted Brainard's argument that weakness in the global economy could constrain U.S. growth more than policymakers currently anticipate. Manufacturing jobs, which are among the most exposed to the global economy, actually fell by 1,000 in November, the third drop in the last four months.

"While this report can help justify a rate hike in December, it can't justify anything more than a very gradual path of rate hikes," said Brian Jacobsen, a portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.

(Reporting by Jason Lange and Lindsay Dunsmuir in Washington; Additional reporting by Dion Rabouin and Rodrigo Campos in New York; Editing by David Chance and Chizu Nomiyama)