US Treasuries gained on Wednesday as investors speculated that a potential resolution to the Iranian conflict could clear a path for the Federal Reserve to resume interest rate cuts.
Yields on two-year and 10-year government notes each slipped by as much as 6 basis points, reaching 3.73% and 4.26% respectively, as futures dipped under the $100 per barrel mark.
Market optimism is rising regarding an end to the Middle East hostilities that have recently unsettled global finance. This follows comments from US President on Tuesday suggesting the war could conclude within two to three weeks; he is slated to deliver a national address on Wednesday evening.
“For Trump, this is not something he can afford to let drag on, with approval ratings starting to decline and risk continuing to fall,” said Kenta Inoue, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, according to Bloomberg.
During their March 17-18 session, Fed policymakers held interest rates steady. Chair Jerome Powell noted at the time that it remained premature to determine the full extent of the economic impact from surging energy costs.
Inflationary pressures from Iran war
Federal Reserve Bank of Kansas City President Jeff Schmid warned on Tuesday that the central bank must not ignore the inflationary pressures resulting from the Iranian energy spike.
Schmid argued that rising oil and gas prices would likely permeate core inflation via higher airfares and logistical expenses. He pointed out that price growth has exceeded the Fed’s 2% target for five years, expressing concern that inflation might remain entrenched near 3%.
“This oil shock comes at a time when inflation already has been too high for too long,” Schmid said. “With inflation already running hot, now is not the time to assume that the inflation from higher oil prices will be transitory.”
On Monday, Chair Powell reiterated the necessity of vigilant inflation monitoring. He acknowledged, however, that the Fed has limited tools for energy shocks, which often fluctuate rapidly while monetary policy impacts the economy over a longer horizon.
“You have to carefully monitor inflation expectations because you could have a series of big supply shocks and that can lead, you know, the public generally, businesses, price setters, households … to start expecting higher inflation over time. Why wouldn’t it?” Powell said.
The S&P 500 futures rose 0.5% as of 6:26 a.m. New York time. The Nasdaq 100 futures gained 0.6% and the futures on the Dow Jones Industrial Average added 0.5%. The MSCI World Index rose 0.9%.