UPDATE 1-Fed seen slowing rate hike pace further next month

Updates markets, adds background

Jan 6 (Reuters) -
The Federal Reserve is seen slowing its interest-rate hikes further after a government report on Friday showed wage growth cooled a bit last month, a hint that the Fed's steep rate hikes last year are beginning to ease upward pressure on prices.

Fed funds futures traders after the Labor Department report priced in about a 70% chance that the Fed would raise rates just a quarter of a percentage point at its meeting Jan. 31-Feb. 1, versus about a 30% chance seen of a half-point hike equal to what it delivered in December.

The current target range is 4.25%-4.5%, and a quarter-point rate hike would put the policy rate in the 4.5%-4.75% range.

Traders also trimmed bets on further rate hikes, and see a slightly better than even chance the Fed will end its current round of policy tightening with rates at around 5%, based on prices of interest-rate futures.

That's less than the 5%-5.25% range that Fed policymakers overwhelmingly expect to be , with several anticipating even higher rates will be to bring down inflation.

The report showed average hourly earnings rose 0.3% in December, slower than the 0.4% increase seen in November. But it also showed a decline in the unemployment rate to 3.5%, and employers adding 223,000 jobs, more than analysts had expected.

"The problem is that the job market is still tight," said Gary Schlossberg, global strategist at Wells Farge Investment Institute. "That has to keep the market on edge in terms of what it means for inflation and what the Fed does about it."

(Reporting by Ann Saphir with reporting by Sinead Carew
Editing by Gareth Jones)

((ann.saphir@thomsonreuters.com;))