"Federal Reserve News Agency": Employment exceeds expectations, temporarily easing the Fed's dilemma; markets cut back on rate cut bets.

A strong March jobs report has prompted markets to reassess the Federal Reserve’s monetary policy path. U.S. Treasury prices fell, yields rose, and traders have essentially erased all bets on rate cuts for the remainder of this year.

“New Fed Communications” Nick Timiraos said the data temporarily moved the tricky policy dilemma of “keep jobs or curb inflation” off the table.

March nonfarm payrolls increased by 178k, beating market expectations; the unemployment rate unexpectedly fell, and the month-over-month jobs gain was the largest since late 2024. After the release, the interest-rate swaps market showed that the pricing for rate cuts this year fell from roughly 4 basis points before the report to nearly zero, and bets on rate cuts next year were also scaled back.

Timiraos believes that the resilience of the jobs market means the Fed does not yet need to face the difficult choice between “growth and inflation,” and could further strengthen the internal case within the central bank for abandoning a tendency toward rate cuts, on the view that interest rates are already close to the neutral level.

Timiraos: Job-market resilience gives the Fed a temporary reprieve from the policy dilemma

Timiraos said after the report was released that the key takeaway is that it temporarily removes a “more difficult issue” from the Fed’s decision agenda.

Federal Reserve Chair Jerome Powell said this week that a surge in energy prices triggered by the war in the Middle East has created the possibility of a trade-off between inflation and the jobs market, but the Fed is not facing that situation right now—March’s nonfarm data further reinforces this judgment.

A decline in the unemployment rate, combined with a rebound after February’s jobs data saw a sharp drop, suggests that the jobs market’s real conditions may be healthier than it previously appeared—at least before the Middle East conflict shocks it.

Timiraos said the latest data allows the Fed to hold off on taking a stance on policy trade-offs, which could strengthen the voice of the camp inside the Fed that has, in the past two meetings,一直 argued for moving away from a bias toward rate cuts and believes rates are very close to the neutral level.

Employment data weighs on rate-cut expectations; U.S. Treasury yields rise across the board

After the jobs report was released, U.S. Treasuries fell across the curve during the shortened trading session on Friday, with yields generally up 3 to 5 basis points. The 2-year yield led higher, rising 5 basis points to 3.85%; the 10-year yield climbed to 4.35%.

Before the data was released, overnight index swaps reflected only about 4 basis points of rate-cut expectations for this year; after the report, this pricing was essentially wiped out, and the market also modestly reduced bets on rate cuts next year.

David Robin, an interest-rate strategist at TJM Institutional Services LLC, said the likelihood that the Fed “will stay on hold in June and even for longer is growing,” adding that “this is the data from before the outbreak of the conflict, but it still points to a higher baseline.”

Scott Buchta, head of fixed-income strategy at Brean Capital LLC, said the report “should remove concerns that the employment-market fundamentals were basically in place before the oil shock,” and that “earlier worries about inflation had reset market expectations for yields from a Fed that stays on hold to a higher level, and this data further reinforces that view.”

The data is lagging; the war’s impact hasn’t been factored in

Despite the strong jobs data, several analysts noted its limited usefulness.

In a client note, Jefferies chief U.S. economist Thomas Simons wrote: “These data are basically mirror-looking, and may not yet reflect any impact from the recent surge in energy prices or any effects related to the war in Iran.”

Buchta also pointed out that “how the oil-price shock will transmit into the real economy in the coming months remains quite uncertain”: “All costs are rising, while the growth in income is not as strong as before.”

Looking back at the policy backdrop, the Fed cut rates three times last year to respond to signals of weakness in the jobs market, then paused rate cuts in January this year because labor conditions had improved. January’s jobs data was stronger than expected; February’s data showed fatigue. This March rebound brings the overall jobs-market outlook back to a more optimistic stance.

Oil prices and the Middle East situation remain the market’s main variables

Investors are not solely focused on the jobs data itself; the Middle East situation is still a key factor driving the direction of U.S. Treasuries. Since the United States carried out an attack on Iran in late February, Treasury yields have broadly risen alongside oil prices, and concerns that inflation could return—prompting the Fed to delay rate cuts—have continued to intensify.

Before the fighting broke out, overnight index swaps had priced more than two cuts of 25 basis points for this year; afterward, expectations were quickly wiped away, and traders briefly began betting that the Fed’s next move would be rate hikes. More recently, market expectations have shifted to the view that the Fed will keep rates unchanged in 2026.

In addition, according to Bloomberg, the previously accumulated short positions in U.S. Treasuries have declined somewhat over the past several trading days; traders are hedging against a growth shock stemming from near-term inflation pressure, and there has also been demand in the Treasury options market for protection against yield declines as investors prepare for the potential gap risk after the spot market reopens on Monday.

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