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

Ask AI · How does employment resilience influence internal Federal Reserve policy debates?

Strong March non-farm employment reports have led the market to reassess the Fed’s monetary policy path. U.S. Treasury prices fell, yields rose, and traders nearly wiped out all remaining bets on rate cuts by the Fed for the rest of this year.

“New Federal Reserve News Agency” Nick Timiraos pointed out that this data temporarily removes the difficult policy dilemma of “saving jobs or controlling inflation” from the table.

Non-farm payrolls increased by 178k in March, exceeding market expectations, with the unemployment rate unexpectedly falling, and the monthly employment increase being the largest since the end of 2024. After the data was released, the interest rate swap market showed that the expectation of rate cuts this year dropped from about 4 basis points before the report to nearly zero, and bets on rate cuts next year also narrowed.

Timiraos believes that the resilience of the job market means the Fed does not need to face the tough choice between “growth and inflation” for now, and it may further strengthen the voice within the Fed that favors abandoning rate cuts, considering interest rates are already close to neutral.

Timiraos: Employment resilience temporarily spares the Fed from policy dilemmas

After the report was released, Timiraos pointed out that the core significance of this data is that it temporarily removes a “more thorny issue” from the Fed’s decision-making agenda.

Fed Chair Powell said earlier this week that the surge in energy prices caused by the Middle East war could create a potential trade-off between inflation and the labor market, but the Fed is not currently facing this situation — the March non-farm data further solidified this judgment.

The decline in the unemployment rate, combined with the rebound after a sharp slowdown in February employment data, suggests that the actual state of the labor market may be healthier than previously thought, at least before the impact of Middle Eastern conflicts.

Timiraos stated that the latest data allows the Fed to hold off on making statements about policy trade-offs, which could strengthen the influence of the camp within the Fed that has been advocating for no rate cuts in the past two meetings and believes interest rates are already very close to neutral.

Employment data dampens rate cut expectations, U.S. Treasury yields rise across the board

Following the employment report, U.S. Treasuries declined across the board during the shortened trading session on Friday, with yields generally rising by 3 to 5 basis points. The 2-year yield led the gains, rising 5 basis points to 3.85%; the 10-year yield increased to 4.35%.

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

David Robin, a rate strategist at TJM Institutional Services LLC, said that the Fed is “increasingly likely to hold steady in June and for a longer period,” and noted that “this is data before the conflict erupted, but it still shows a higher baseline.”

Scott Buchta, head of fixed income strategy at Brean Capital LLC, believes that this report “should dispel market concerns about the employment fundamentals before the oil shock,” and that “previous inflation worries have reset market expectations for no rate cuts by the Fed to a higher level, and this data further consolidates that view.”

Data is lagging, war impacts not yet reflected

Despite the strong employment data, many analysts have pointed out its limited reference value.

Thomas Simons, chief U.S. economist at Jefferies, wrote in a client report: “These data are essentially rear-view mirror figures and may not yet reflect recent increases in energy prices or risks related to the Iran war.”

Buchta also pointed out that how the oil price shock will transmit to the real economy over the coming months remains uncertain: “All costs are rising, and income growth is no longer as robust as before.”

Looking at the policy background, the Fed cut rates three times last year to respond to signals of a weakening labor market, and paused rate cuts in January this year, citing improvements in employment conditions. January employment data was better than expected, while February data showed signs of fatigue. The rebound in March data has restored a relatively optimistic overall employment outlook.

Oil prices and Middle Eastern situation remain the main variables for the market

Investors’ focus has not been entirely on the employment data itself; the Middle Eastern situation remains the key factor influencing the direction of U.S. Treasuries. Since the U.S. attacked Iran in late February, Treasury yields have generally risen along with oil prices, and concerns about a resurgence of inflation prompting the Fed to delay rate cuts have continued to intensify.

Before the conflict, overnight index swaps priced in more than two 25-basis-point rate cuts within the year; these expectations were quickly erased afterward, and traders briefly began betting that the next move by the Fed would be a rate hike. Recently, market expectations have shifted toward the Fed maintaining rates in 2026.

Additionally, according to Bloomberg, the previously accumulated short positions in U.S. Treasuries have decreased in recent trading days, as traders hedge against the growth shocks from short-term inflation pressures, and the Treasury options market has seen increased demand for downside protection on yields, with investors preparing for potential gaps when the cash market reopens on Monday.