Author：Wall Street CN

A strong March nonfarm payroll report prompted markets to reassess the Federal Reserve's monetary policy path. U.S. Treasuries fell and yields rose, with traders virtually erasing all bets on Fed rate cuts for the remainder of the year.

Nick Timiraos, the "new Fed watchdog," points out that this data temporarily removes the thorny policy dilemma of "preserving jobs versus controlling inflation" from the table.

Nonfarm payrolls increased by 178,000 in March, exceeding market expectations, and the unemployment rate unexpectedly fell. This was the largest monthly job growth since the end of 2024. Following the data release, the interest rate swap market showed...Expectations for a rate cut this year have fallen from about 4 basis points before the report was released to almost zero, and bets on a rate cut next year have also narrowed.

Timiraos believes that the resilience of the job market means that the Federal Reserve does not have to face the difficult choice between "growth and inflation" for the time being, and may further strengthen the confidence of the camp within the Fed that advocates abandoning the tendency to cut interest rates and believes that interest rates are close to the neutral level.

Timiraos: Employment resilience puts the Fed in a dilemma regarding temporary policy suspension.

Timiraos pointed out after the report was released that the core significance of this data is that it temporarily removes a "more difficult problem" from the Federal Reserve's decision-making agenda.

Federal Reserve Chairman Jerome Powell said this week that the surge in energy prices triggered by the Middle East wars has created the possibility of a trade-off between inflation and the job market, but the Fed has not yet faced this situation – the March non-farm payroll data further solidified this judgment.

The decline in the unemployment rate, coupled with the rebound after a sharp drop in February's employment data, suggests that the actual state of the job market may be healthier than it appeared before, at least before the impact of the Middle East conflict.

Timiraos stated that the latest data allows the Fed to postpone making statements on policy choices, which may strengthen the voice of the camp within the Fed that has been advocating against rate cuts in the past two meetings and believes that interest rates are very close to neutral levels.

Employment data dampened expectations of interest rate cuts, causing US Treasury yields to rise across the board.

Following the release of the jobs report, U.S. Treasuries fell across the board in a 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%, while the 10-year yield rose to 4.35%.

Before the data was released, overnight index swaps only reflected an expectation of about 4 basis points of rate cuts this year. After the report was released, this pricing essentially disappeared, and the market also slightly reduced its bets on rate cuts next year.

David Robin, interest rate strategist at TJM Institutional Services LLC, said the Federal Reserve is "increasingly likely to remain on hold in June and beyond," noting that "this data comes before the conflict, but still shows a higher baseline."

Scott Buchta, head of fixed income strategy at Brean Capital LLC, believes the report "should dispel market concerns about the state of the labor market before the oil shock," and that "previous concerns about inflation had already reset market expectations for yields from the Fed holding rates steady to higher levels, and this data further reinforces that view."

The data is outdated; the impact of the war has not yet been included.

Despite the strong employment data, several analysts have cautioned that its reference value is limited.

In a client report, Jefferies Chief U.S. Economist Thomas Simons wrote:"These figures are essentially rearview mirror images and may not yet cover any impact from recent energy price increases or risks associated with the war with Iran."

Buchta also pointed out that there is still considerable uncertainty about how the impact of oil prices will be transmitted to the real economy in the coming months: "All costs are rising, while income growth is not as strong as before."

Looking back at the policy context, the Federal Reserve cut interest rates three times last year to address signs of weakness in the job market, and then paused rate cuts in January of this year, citing improved employment conditions. January's employment data was stronger than expected, while February's data showed signs of weakness. The rebound in March's data has brought the overall job market situation back to a relatively optimistic level.

Oil prices and the situation in the Middle East remain the main market variables.

Investors are not entirely focused on the employment data itself; the situation in the Middle East remains a key factor driving the direction of US Treasury bonds. Since the US attack on Iran at the end of February, US Treasury yields have generally risen along with oil prices, as market concerns about a resurgence of inflation and the Federal Reserve delaying interest rate cuts continue to intensify.

Before the outbreak of war, overnight index swaps priced in more than two 25-basis-point rate cuts this year; this expectation was quickly wiped out, and traders began betting that the Fed's next move would be a rate hike; recently, market expectations have shifted to the Fed keeping interest rates unchanged in 2026.

In addition, according to Bloomberg,Previously accumulated short positions in US Treasuries have decreased in recent trading days, as traders hedge against the growth shocks brought about by short-term inflationary pressures. There is also demand for yield protection in the Treasury options market.Investors are bracing for a potential gap after the spot market reopens on Monday.