WASHINGTON, June 5 (Reuters) - A blowout May jobs report is likely to further ease concerns among U.S. Federal Reserve officials about weakness in the labor market and focus attention on inflation risks, leaving incoming Chairman Kevin Warsh to manage growing support among his colleagues for possible rate hikes.

U.S. firms reported creating 172,000 additional jobs in May, more than double consensus estimates among economists and pushing average hiring over the last three months back to levels more typical of the decade before the COVID-19 pandemic.

Between the massive rehiring seen in the wake of the pandemic, the surge of immigration that fueled it, and the Trump administration's subsequent crackdown on foreign-born workers, expectations about what "normal" job growth might look like in the future had become unmoored. Many economists and Fed policymakers felt that monthly employment gains, long a barometer for the economy's health, could virtually disappear without triggering worries about a downturn or causing any change in the unemployment rate.

But the last three months may lead to speculation about yet another new normal, with the month of May showing an increase in the number of people working and looking for work, as more were hired directly from the sidelines of the job market or began a job search. The influx was enough to keep the unemployment rate steady at 4.3% even with the boost in hiring. Job gains in March and April were revised up sharply.

For Warsh, about to oversee his first meeting as Fed chair on June 16-17 amid expectations that he would be guiding the Fed towards lower rates, pressure may now be building in the other direction. Investors after release of the employment data boosted bets the Fed will raise rates in December.

"The third consecutive consensus-beating gain in non-farm payrolls in May should further reduce concern among the FOMC about the downside risks to the labor market, thereby making it even harder for the Fed to try to look through elevated rates of core and headline inflation," Stephen Brown, chief North America economist for Capital Economics, wrote following the release of the jobs data. "Providing the labor market does not suffer a dramatic summer jobs scare again, then it looks increasingly likely that the (Federal Open Market Committee) will enact a couple of insurance hikes later this year."

After generating a monthly average of fewer than 10,000 new jobs in 2025, with hiring undercut by uncertainty around import tariffs, the Trump administration's immigration crackdown and the economic outlook, employment growth in the first five months of 2026 has now averaged 113,000.

The rise in hiring has been enough to shift the outlook for interest rates away from further cuts, with key policymakers like Fed Governor Christopher Waller saying they see the job market now as largely stable and view containing persistently high inflation as the Fed's main priority - a sentiment that may now form the majority view at the Fed.

"I can no longer rule out rate hikes further down the road if inflation does not abate soon," Waller said in remarks last month that represented a further shift away from the job market worries that had led him to support rate cuts in 2025 and continue to advocate for them through the first months of this year when he, too, was under consideration as a possible Fed chief. "Recent jobs data show that the labor market appears to be stabilizing and the unemployment rate is fairly low and stable."

Warsh, who took over from former Fed Chair Jerome Powell in the middle of May, argued in the run-up to his nomination for the job by President Donald Trump that interest rates could fall because the president's policies and the spread of artificial intelligence technology would lead to higher productivity and faster growth alongside slowing inflation.

The data so far are running in a different direction, with inflation seemingly stuck a percentage point or more above the Fed's 2% target and on track for a sixth straight year higher than that level.

Further data on inflation will be released next week.

DELAYED RETURN TO TARGET

Some outside observers, too, see elevated inflation remaining for longer. The International Monetary Fund now does not expect inflation to return to the Fed's 2% target until the end of 2027 rather than the middle of next year because of the effects of the U.S.-backed war with Iran.

"So we've now delayed a bit further the return to target," IMF spokesperson Julie Kozack said on Thursday. "We do see sort of upside risk to inflation, and that it implies that the Fed's policy actions will need to proceed with caution and will need to be carefully calibrated to incoming data."

Three Fed policymakers dissented at the April 28-29 meeting in favor of shifting the central bank's current policy stance in a hawkish direction that would open the door to a rate hike rather than pointing towards a cut as the next most likely change. Waller has said he now agrees with that approach and other policymakers have begun talking more openly about the possible need for tighter policy - counter to Trump's expectations that rates will fall under Warsh.

It's a sensitive matter given Trump's expectations for lower borrowing costs and upcoming U.S. midterm elections in November that may hinge on the state of the economy.

Some of the current inflation can be traced to the Iran war, now in its fourth month and responsible for an oil shock that continues to echo through the economy. Benchmark crude oil prices have fallen recently, but traffic through the strategic Strait of Hormuz off the coast of Iran remains impeded and a deal ending the conflict still has not been reached.

In economic commentary from the Fed's 12 regional districts released on Wednesday, business and community contacts sketched out the long tail of a surge in oil prices that seems to have primed other prices to continue rising as business executives pass on higher costs for things like fertilizer, shipping, and metals to consumers.

"The big question now is do we stay patient?" Kansas City Fed President Jeffrey Schmid said on Thursday at an economic forum in Oklahoma. "Our inflation numbers have probably crept up into the 3.50% range, which nobody likes. Is it temporary ... Or do we act? Do we say, 'okay, now it's time to raise rates a quarter (of a percentage point) or two and see if we can't tamp this thing down?"