Wall Street spent all last week pricing in a rate hike. By Monday afternoon, that trade was dead.
Fed Chair Jerome Powell spoke at Harvard and said what bond traders needed to hear - the central bank isn't going to chase oil prices with higher borrowing costs. The shift was instant. Treasuries jumped. Stocks climbed. And the odds of a 2026 rate increase basically vanished.
A month into the Iran war, crude prices have spiked and fuel costs are dragging on consumers. That's the kind of thing that usually gets the Fed talking about tightening.
Powell took the opposite approach. He argued that jacking up rates now would only hurt the economy later - long after oil prices have cooled off. Rate changes take months to filter through the financial system. By the time higher rates actually bite, the energy shock could already be in the rearview mirror.
"The tendency is to look through any kind of a supply shock," he said. The Fed's current rate - sitting between 3.5% and 3.75% - gives policymakers enough room to wait and watch without rushing into action.
Before Powell's appearance, traders had put better-than-even odds on a quarter-point hike this year. That reflected real fear that oil-driven price spikes would force the Fed's hand.
Those bets collapsed in real time. By the end of the session, the probability of a December rate increase had fallen to just over 2%. Bond prices rallied - a clear sign investors believe the Fed is done tightening for now.
The bond market's own inflation gauge backs Powell up. The five-year breakeven rate - which measures what investors expect inflation to average over the next five years - was sitting near 2.56% and falling. That's not a market bracing for runaway prices.
Powell also weighed in on the growing mess in private credit - the $3 trillion corner of finance where companies borrow directly from funds instead of banks.
Defaults are climbing. Some funds have frozen withdrawals. Investors are pulling cash.
Powell said the Fed is keeping a close eye on it but hasn't found the kind of links to the banking system that would turn a correction into a crisis. He was careful not to brush off the risk - but he made clear the Fed doesn't see a 2008-style chain reaction forming.
Powell's term wraps up in mid-May. His likely replacement, former Fed Governor Kevin Warsh, has signaled he'd prefer rates lower than where they are now. But Warsh's confirmation is stuck - held up by a Senate fight tied to an ongoing Justice Department probe into renovations at the Fed's headquarters.
Until that gets resolved, Powell stays in the chair. And his message on Monday was simple: the Fed isn't panicking over oil, it isn't raising rates, and it's keeping the private credit situation on a short leash.
For investors, that's the green light to stop worrying about a surprise rate hike - at least for now.
