Powell shifts traders’ bets, expects rate cuts still possible this year; US Treasuries extend gains, again not following oil prices.

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On Monday, Federal Reserve Chairman Jerome Powell stated that the Fed's interest rates are in a "favorable position," allowing it to overlook oil price shocks related to Iran, but it must remain vigilant regarding changes in inflation expectations. Powell's remarks eased market concerns that the Fed might be forced to tighten monetary policy to curb accelerating inflation, and traders began betting on a small probability of rate cuts this year.

As traders abandoned bets that the Fed would raise rates, the U.S. bond market rebounded from its most severe sell-off in 17 months, with the market's focus shifting to speculation that a war with Iran could worsen the U.S. economic slowdown:

The sharp shift in traders’ expectations for the Fed’s interest rate policy briefly pushed short-term U.S. Treasury yields down by more than 10 basis points that day, with the decline later narrowing. This helped the market stabilize from the most serious monthly drop since October 2024, when investors were betting that Trump’s victory would inject momentum into U.S. economic growth.

Powell also said the same day that the Fed has limited ability to control supply shocks, such as a surge in oil prices triggered by a U.S.-Iran war, which further extended the rally in U.S. bonds.

This rebound in U.S. bonds reflects increasing concerns in the market that Middle East conflicts might impact the U.S. economy. U.S. job growth has already slowed, and higher fuel prices are raising costs for businesses and consumers. Monday’s bond rally marked the second consecutive day of “rising oil prices, falling bond yields.” Earlier, for most of March, U.S. bond yields climbed as energy prices surged, because the market was worried that a war with Iran would trigger rising inflation.

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