Fed's 'solid' growth view faces test as Greek drama unfolds

A detail from the front of the United States Federal Reserve Board building is shown in Washington October 28, 2014. REUTERS/Gary Cameron · Reuters

By Philip Blenkinsop

BRUSSELS (Reuters) - The Federal Reserve's upgraded view that growth in the world's biggest economy is "solid", and so capable of withstanding an interest rate rise this year, will be put to the test by U.S. jobs data this week.

Ructions over Greece's new anti-austerity government will also continue to grip markets, and could overshadow economic data in the coming days.

The Federal Reserve last week lifted its assessment of the U.S. expansion to "solid" from "moderate", with jobs growth now seen as "strong".

A Reuters poll forecasts that U.S. employment data on Friday will show about 230,000 jobs were created in January, slowing slightly from 252,000 in December but still robust.

If confirmed it would be 12th consecutive month of payroll increases above 200,000, the longest such stretch since a 13-month run in 1994-95.

"Interest rates then were 6 percent. It simply isn't a zero percent environment at the moment," said Harm Bandholz, chief U.S. economist at UniCredit.

Weak wage growth has dented some of the optimism created by strong job creation.

Average wages fell 0.2 percent in December, the biggest decline in at least eight years, although some economists said that may have been a seasonal fluke, and the consensus is for a 0.3 percent increase in January.

In an encouraging sign, the more widely respected Employment Cost Index, released on Friday, showed labour costs increased by 2.2 percent in the 12 months through December, although still below the 3 percent economists say is needed to bring inflation close to the Fed's 2 percent target.

Fed officials have indicated that interest rates could rise as soon as in June, though futures contracts indicate investors expect a first move in September. The target rate has been close to zero since late 2008.

Fed Chair Janet Yellen has repeatedly said the decision will be data-dependent. U.S. economic growth cooled in the fourth quarter of last year but consumer sentiment hit an 11-year high, data showed on Friday.

Institute for Supply Management reports on Monday and Wednesday and consumer spending data on Monday will provide further pointers next week.

GREEK WRESTLING

In an addition to its post-meeting statement last week, the Fed said its assessment of interest rates would also take into account "international developments".

Bernd Weidensteiner, U.S. economy specialist at Commerzbank, said non-U.S. events would not change the general course of U.S. monetary policy but could affect the timing.

"The U.S. is still a relatively closed economy. The economic cycle is made in America," he said. "But if, say, something awful happened with Greece, it would affect U.S. markets."