WASHINGTON – American employers hired workers at the fastest pace in seven months in October, validating the Federal Reserve’s view that the economy is regaining “traction” and making the central bank less likely to halt its campaign of interest-rate increases.

Non-farm payrolls grew by a robust 337,000 in last month – the biggest increase since March, the Labor Department said Friday. The department also revised its estimates of payrolls growth for September and August, saying employers added 113,000 more jobs than previously thought. That brought the total number of jobs created over the last 13 months to 2.2 million.

The strong job growth drew previously discouraged workers back into the civilian labor force, expanding it by 367,000 to 147.9 million. The unemployment rate, as a result, rose a tenth of a percentage point, to 5.5%. Most economists now expect jobs to grow at a pace of 200,000 a month for the remainder of the year, although the unemployment rate is not expected to fall much.

The Labor Department’s numbers surprised Wall Street. The average forecast of economists surveyed by Dow Jones Newswires and CNBC had called for a 192,000 increase in payrolls and a 5.4% unemployment rate. The dollar rose in reaction and bond yields climbed.

Analysts said the strong job creation suggested the Fed will extend its campaign of interest-rate increases at least through March of 2005. “The implication is there’s no particular reason to pause,” said Edward McKelvey, an economist with Goldman Sachs & Co in New York. “If anything, this report suggests the economy may be much stronger than (the Fed) anticipated.”

He predicted the Fed will raise its key federal funds rate by a quarter percentage point to 2% next week and continue raising the rate over the next few months until it reaches 2.75% by the end of March. Fed policy-makers have said they want to restore the rate gradually to a “neutral” level that neither stimulates nor constrains economic growth.

Since June the Fed has raised the funds rate three times, lifting it from a four-decade low of 1%. The rate increases, however, began just as the pace of job creation faltered. Economists say a normal job-creation rate for an economy in recovery is about 240,000. From June through September, however, the average was a meager 129,500.

That sluggish performance boosted expectations on Wall Street that the Fed would take a break from its interest-rate campaign in December. But economists say the latest economic data leave little doubt that the labor market is on the upswing. Under those circumstances, the Fed is not likely to halt its campaign of interest-rate increases, analysts said.

Over the last 13 months, employers have restored more than 80% of the 2.7 million jobs cut over the previous two-and-a-half years. If economists’ expectations of job growth over the next few months prove correct, all of the lost jobs could be restored by the time President Bush is inaugurated to a second term in January.

“Companies are hiring again – there’s no question about it,” said Eric Goodstadt, chief marketing officer for Management Recruiters International in Philadelphia. “They’re seeing a recovery in the marketplace, they’re seeing people spending and now they’re ready to increase hiring.”

Some economists said the surge in oil prices this year poses enough of a risk that the Fed will remain cautious about raising interest rates. Tim McGee, an economist with U.S. Trust Co. in New York, said the October jobs growth makes it less likely the Fed will “pause” its interest-rate campaign in December, although “it’s still an open question.”

In its report Friday, the Labor Department revised its estimates of job growth for August and September, saying employers added 198,000 jobs in August and 139,000 in September. Previous estimates had shown a 128,000 increase in August and a 96,000 increase in September.

The report showed the service-producing industry added 272,000 jobs in October, the largest increase since April. Within that category, the professional and business-services industry – which includes temporary employment services – added 97,000 jobs, the biggest increase since April. The construction industry added 71,000, the biggest increase since March 2000.

The manufacturing industry, however, shed jobs for a second month in a row. Manufacturing jobs declined by 5,000 last month after a 14,000 decline in September. The jobs growth coincided with a minuscule increase in average hourly earnings, which rose five cents to $15.83 in October. Wage gains accelerated in year-on-year terms: The increase last month was 2.6%, up from 2.4% in the year through September. The average work week was unchanged at 33.8 hours.

Despite the strong jobs growth last month, the jobs market remained a long way from the conditions that prevailed before the 2001 recession. The Labor Department said 8.1 million people remained unemployed in October. The number of people who have been jobless for 27 weeks or more rose to 1.79 million from 1.75 million in September.