WASHINGTON (Reuters) - U.S. job growth surged more than expected in January as construction firms and retailers ramped up hiring, but wages barely rose, handing the Trump administration both a head start and a challenge as it seeks to boost the economy.

Nonfarm payrolls increased by 227,000 jobs, the largest gain in four months, the Labor Department said on Friday. The unemployment rate, however, rose one-tenth of a percentage point to 4.8 percent and wages increased by only three cents, suggesting that there was still some slack in the labor market.

Still, the labor market is tightening and could hopefully soon spur faster wage growth. Federal Reserve officials view the jobs market as being at or near full employment.

U.S. government bond prices initially rose as traders focused on the disappointing wage growth, which investors saw as keeping the Fed on a gradual path of interest rate increases this year. In late trade, U.S. Treasuries were mostly flat while the dollar was little changed against a basket of currencies.

Stocks on Wall Street ended higher, with the S&P 500 index .SPX just shy of its record peak.

Economists polled by Reuters had forecast payrolls rising 175,000 last month and the unemployment rate unchanged at 4.7 percent. The economy created 39,000 fewer jobs in November and December than previously reported.

“While there’s a great deal of anticipation surrounding steps that President Trump and the GOP-led Congress are expected to take to boost the economy, that’s going to take more time,” said Mark Hamrick, a senior economic analyst at Bankrate.com in Washington.

President Donald Trump vowed during last year’s election campaign to deliver 4 percent annual gross domestic product growth, largely on the back of a plan to cut taxes, reduce regulations, increase infrastructure spending and renegotiate trade deals in the United States’ favor.

Although details on the policy proposals remain sketchy, consumer and business confidence have surged in the wake of Trump’s election victory last November. But with the economy near full employment, some economists are skeptical of the 4 percent growth pledge. Annual GDP growth has not exceeded 2.6 percent since the 2007-08 recession.

Trump, who during the election campaign regularly dismissed the job numbers and the unemployment rate as “phony” and “one of the biggest hoaxes,” welcomed January’s acceleration in hiring.

“So we’re very happy about that. I think that it’s going to continue big league,” said Trump.

Job seekers break out to visit corporate employment personnel at a U.S. Chamber of Commerce Foundation "Hiring Our Heroes" military job fair in Washington January 8, 2016. REUTERS/Gary Cameron

DISAPPOINTING WAGE GROWTH

Average hourly earnings edged up 0.1 percent last month, below expectations for a 0.3 percent rise. December’s wage gain was revised down to 0.2 percent from the previously reported 0.4 percent increase.

There was a big decline in earnings in the financial sector last month, which probably offset minimum wage increases that took effect in 19 states in January. The small gain lowered the year-on-year increase in earnings to 2.5 percent from 2.8 percent in December.

Economists say a growth rate of between 3 and 3.5 percent in wages is needed to lift inflation to the Fed’s 2 percent target. Sluggish wage growth, if it persists, would suggest little urgency from the Fed to tighten monetary policy.

The pace of rate hikes will, however, probably depend on how much inflation is generated from Trump’s proposed measures to bolster economic growth. The U.S. central bank, which raised rates in December, has forecast three rate increases this year.

“The tepid wage data and the relative stability of the unemployment rate should allow the Fed to proceed with rate normalization at an unhurried pace,” said Michael Feroli, an economist at JPMorgan in New York.

A Reuters survey on Friday of the banks that do business directly with the Fed showed the Wall Street firms expected only two rate hikes this year.

On Wednesday, the Fed kept its benchmark overnight interest rate unchanged in a range of 0.50 percent to 0.75 percent. It said it expected labor market conditions would strengthen “somewhat further.”

With its January employment report, the government published its annual “benchmark” revisions and updated the formulas it uses to smooth the data for regular seasonal fluctuations. It also incorporated new population estimates.

The government said the level of employment in March of last year was 60,000 lower than it had reported. As the labor market nears full employment, the pool of workers is shrinking, which is slowing job growth.

The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, was at 62.9 percent in January, the highest level since September. The employment-to-population ratio was at 59.9 percent last month, the highest level since March 2016.

A broad measure of unemployment that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment rose two-tenths of a percentage point to 9.4 percent last month.

Nearly all sectors of the economy added jobs in January. Manufacturing payrolls rose by 5,000 jobs, rising for a second straight month. The gains were mostly at factories making machinery, nonmetallic mineral products, transportation equipment, food and furniture.

“Plenty to build on here for Donald Trump who has tended to put a premium on manufacturing jobs,” said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank in New York.

Construction employment jumped 36,000, the largest increase since March, likely boosted by warm weather. The housing sector led the construction job gains.

Retail payrolls, surprisingly surged 45,900, the biggest rise since February. Retailers, including Macy's M.N, Sears SHLD.O, American Apparel and Abercrombie & Fitch ANF.N announced job cuts in January amid store closures.

Department store sales are being undercut by online retailers, led by Amazon.com AMZN.O.

Employment in the financial sector increased by 32,000 jobs last month, an acceleration from December’s 23,000 gain. But average hourly earnings fell 1.0 percent.

Government employment fell for a fourth straight month in January. Further declines are likely after the Trump administration enforced a hiring freeze on civilian federal government workers on Jan. 22.