WASHINGTON, June 5 (Reuters) - The U.S. economy posted a third straight month of strong job gains in May, confirming the labor market was gaining traction after stumbling last year and giving the Federal Reserve more room to keep interest rates unchanged amid rising inflation due to the war in the Middle East.

The closely watched employment report from the Labor Department on Friday painted an upbeat picture of the jobs market. The economy added 93,000 more jobs in March and April than previously estimated and the unemployment rate held at 4.3% for a third consecutive month. While financial markets boosted the chances of an interest rate hike in December, economists said the bar remains high for monetary policy tightening.

Economists say fiscal stimulus, in the form of tax and import tariff refunds, has cushioned the impact of the U.S.-backed war with Iran, which has stoked inflation through a surge in oil prices. Corporate profits have increased since the second quarter of 2025, allowing businesses to refrain from large-scale layoffs. Economists, however, warned of risks to the labor market if the war persists.

"This report is likely to confirm to the Fed that the labor market is in a stable place, allowing inflation to be the only focus and driver of Fed policy heading into the June meeting," said Sophia Kearney-Lederman, a senior economist at FHN Financial.

Nonfarm payrolls increased by 172,000 jobs last month after rising by an upwardly revised 179,000 in April, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast payrolls would increase by 85,000 jobs after a previously reported rise of 115,000 in April.

Estimates for job growth ranged from 50,000 to 125,000. The payrolls count for March was revised up by 29,000 jobs to 214,000. Economists estimated the economy needs to create between zero and 50,000 jobs per month to keep up with growth in the working-age population. The so-called break-even rate has dropped because of an immigration crackdown that has reduced the labor force, limiting the rise in the unemployment rate.

The labor market had been hampered by uncertainty over the Trump administration's implementation last year of sweeping tariffs, which made businesses cautious about boosting hiring. Though businesses are hiring, much of the improvement in job growth is likely due to historically low layoffs.

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The U.S. Supreme Court in February struck down the tariffs, and some businesses have filed for refunds. Large income tax refunds have allowed consumers to keep spending, though upper-income households are doing most of the heavy lifting.

The run of strong employment gains suggests the labor market could be breaking out of its "slow-hire, slow-fire" equilibrium. U.S. interest rate futures priced in about a 65% chance that the Fed would raise rates in December, compared with 48% earlier, according to LSEG estimates. The U.S. central bank's benchmark overnight interest rate is currently in the 3.50%-3.75% range.

The dollar gained versus a basket of currencies. U.S. Treasury yields rose, with the interest rate-sensitive two-year note hitting its highest level since February 2025. U.S. stocks opened lower.

The leisure and hospitality sector led the broad increase in employment last month, with 70,000 jobs added, well above the average monthly gain of 14,000 over the past 12 months. Payrolls at restaurants and bars rose by 48,000 jobs. These establishments could be hiring in preparation for the FIFA World Cup soccer tournament, which is being partly hosted by the U.S.

Local government employment increased by 55,000 jobs.

The healthcare sector added 35,000 jobs, most of them in ambulatory services. There were also increases in payrolls in the social assistance, mining, quarrying and oil and gas extraction industries. But employment tied to financial activities dropped by 22,000 jobs and is down by 107,000 since a recent peak in May 2025. There were employment losses for insurance carriers and related activities as well as commercial banking.

Annual wage growth slowed to 3.4% from 3.6% in April. Inflation increased at its fastest pace in three years in April, the government reported last week. Income at the disposal of households after adjusting for inflation has dropped for three straight months and the saving rate is at a four-year low, which economists said could undercut consumer spending.

"There is no compelling reason to expect the Fed to cut rates this year," said Kathy Bostjancic, chief economist at Nationwide. "At this point it is premature to anticipate a rate increase. For the Fed to consider a rate hike, the jump in energy prices would need to push up prices of other goods and services away from the immediate direct impact and dislodge the so-far well-contained bond market inflation expectations."