"New Federal Reserve News Agency": Surpassing job growth temporarily resolves the Fed's dilemma; market reduces bets on rate cuts

A strong March nonfarm payroll report has caused markets to reassess the Federal Reserve’s monetary policy path. U.S. Treasury bonds fell, yields rose, and traders have almost wiped out bets on any Fed rate cuts for the remainder of this year.

“New Fed journalist” Nick Timiraos pointed out that these numbers temporarily take the thorny policy dilemma of ‘prioritizing employment or controlling inflation’ off the table.

March nonfarm payrolls increased by 178,000, exceeding market expectations, the unemployment rate unexpectedly dropped, and the monthly employment gain was the largest since the end of 2024. After the data release, the interest rate swaps market shows that rate cut expectations for this year fell from around 4 basis points before the report to nearly zero, and bets on rate cuts next year were also reduced.

Timiraos believes the resilience of the job market means the Fed doesn’t need to face the tough “growth versus inflation” trade-off for now, and may further strengthen the position of those within the Fed who favor abandoning rate cuts and believe interest rates are close to neutral.

Timiraos: Job market resilience temporarily frees the Fed from policy dilemmas

After the report’s release, Timiraos pointed out the core significance of the data is that it temporarily removes a “more thorny problem” from the Fed’s decision agenda.

Fed Chair Powell said this week that the surge in energy prices caused by Middle East conflict could create a potential trade-off between inflation and the job market, but the Fed has not yet faced this situation—a view that the March jobs data further reinforced.

The drop in unemployment rate, combined with a rebound after a sharp decline in February’s jobs data, suggests the job market’s actual state may be healthier than previously appeared, at least before the shock from the Middle East conflict.

Timiraos said the latest data allows the Fed to temporarily refrain from making a policy trade-off, which may further empower those inside the Fed who, in the past two meetings, advocated dropping rate cut bias and believe rates are very close to neutral.

Job data suppresses rate cut expectations, U.S. Treasury yields rise across the board

After the jobs report was released, Treasuries fell across the board in Friday’s shortened trading session, yields generally rose by 3-5 basis points. The 2-year yield led the way, rising 5 bps to 3.85%; the 10-year yield rose to 4.35%.

Before the data release, overnight index swaps reflected only about 4 basis points of rate cut expectations for this year. After the report, this pricing dropped to essentially zero, and the market also slightly reduced bets on rate cuts next year.

David Robin, rates strategist at TJM Institutional Services LLC, said the Fed is increasingly likely to “stay on hold in June and for even longer,” noting, “These are pre-conflict data, but still show a higher baseline.”

Scott Buchta, head of fixed income strategy at Brean Capital LLC, believes that this report “should dispel concerns about the underlying health of the job market before the oil shock,” and “previous inflation worries have reset market expectations for Fed policy rates to a higher level, and this data further reinforces that view.”

Data is lagging, war impacts not yet reflected

Despite the strong jobs report, several analysts warned about its limited reference value.

Jefferies chief U.S. economist Thomas Simons wrote in a client note: “This data is basically backward-looking, and probably hasn’t captured any impact from the recent rise in energy prices or risks related to the Iran war.”

Buchta also noted that how oil price shocks transmit to the real economy in coming months remains highly uncertain: “All costs are rising, while income growth is not what it used to be.”

Looking back at the policy context, the Fed cut rates three times last year to address signals of job market weakness, and paused rate cuts in January this year as job conditions improved. January’s jobs data was stronger than expected; February showed weakness; and March’s jump made the overall job market look relatively upbeat again.

Oil prices and Middle East situation remain the main market variables

Investors are not fully focused on the jobs data itself—the Middle East situation remains a key factor driving Treasury performance. Since the U.S. attack on Iran at the end of February, Treasury yields have risen along with oil prices, and concerns about renewed inflation and delayed Fed rate cuts have continued to grow.

Before the conflict erupted, overnight index swaps had priced in more than two 25bp Fed rate cuts this year; those expectations were erased after the conflict, and traders began to bet the Fed’s next move would be a rate hike; recently, the market expects the Fed will keep rates unchanged until 2026.

Furthermore, according to Bloomberg, short positions accumulated in Treasuries have shrunk somewhat over the past few trading days, as traders hedge against growth shocks from near-term inflation pressures, and the Treasury options market has also seen demand for downside yield protection; investors are preparing for possible price gaps when the spot market reopens on Monday.

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