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By Ann Saphir
May 2 (Reuters) - The Federal Reserve could start raising benchmark interest rates in just over a year, based on trading in U.S. short-term interest-rate futures after a government report showed employers added many more jobs than expected in April.
The surge in job creation, which topped economists' expectations by more than 30 percent, helped push U.S. unemployment to a 5-1/2 year low.
Traders bet that the rosier jobs picture could prompt the Fed, which has kept rates near zero for more than five years, is as likely as not to raise rates as soon as next June, about six weeks earlier than traders had forecast before the report.
But the jobs data also showed a sharp decline in labor force participation, a rate that Fed Chair Janet Yellen has said she watches closely. A drop in the rate is seen as sign of labor market weakness.
"The big drop in the unemployment rate may cause some concerns in consideration of what the Fed may do," said Russell Price, senior economist at Ameriprse Financial in Troy, Michigan. "But I still think that we're looking at a second quarter of 2015 likelihood for the first consideration for the hike in the Fed funds rate."
Futures contracts tied to the fed funds rate, the U.S. central bank's target rate for overnight lending between banks, dropped after the reports.
The contracts show markets are assigning a roughly 50 chance of a first Fed rate hike in June 2015, based on CME FedWatch, which tracks rate hike expectations using the contracts. Before the report, they showed traders gave a first rate hike in June 2015 only about a 47 percent chance, and that they thought the Fed was much more likely to wait until July 2015 to raise rates.
The Fed has targeted short-term rates of between zero and 0.25 percent since December 2008, and has promised to keep them there for a "considerable time" after it ends its bond-buying program. (Reporting by Ann Saphir in San Francisco with additional reporting by Herb Lash in New York and Lucia Mutikani in Washington; Editing by Chizu Nomiyama)