Treasuries Gain as Fed Officials Signal Possible Rate Cut Ahead of Time: Market Reacts to Powells Comments and Consumer Confidence Data

Treasuries rose on Tuesday after Federal Reserve Chair Jerome Powell said that "many paths are possible" for monetary policy, opening the door to an earlier rate cut this year. The gains pushed yields lower across the curve, with the two-year notes - the maturity most sensitive to the Fed's rate path - dropping five basis points to about 3.81%.

Powell's comments came during a House committee hearing, where he was asked about the Fed's approach to monetary policy in light of the current economic environment. While Powell maintained his call for patience as the economy absorbs the impact of trade tariffs, he said that lower inflation and weaker labor hiring could lead to an earlier rate cut.

The rally in Treasuries was fueled by a surprisingly weak consumer confidence report on Tuesday morning, which showed that consumers are becoming increasingly concerned about the economy and their prospects for jobs and income due to trade policy. The gains were further boosted by comments from other Fed officials, including Christopher Waller and Michelle Bowman, who voiced potential support for a reduction as soon as next month if data supports it.

Traders are now fully pricing in two quarter-point Fed reductions by the end of the year, with a move in September far more likely than July. In the swaps market, the probability of a Fed cut next month has risen to around 10% from near zero a week ago.

The rally in Treasuries failed to curb demand for $69 billion of new two-year notes, with the auction yield - the lowest that successful bidders in aggregate would accept - at 3.786%. This is just below where the notes were trading just before the bidding deadline and lower than the 3.955% they accepted last month.

The Bloomberg Dollar Spot Index also extended its slide during Powell's comments, falling 0.6% by late afternoon. The yen and Swiss franc advanced the most among G-10 currencies against the greenback.

The market moves also came as the Conference Board's gauge of consumer confidence slid in June on concerns about prospects for the economy, labor market, and incomes due to trade policy. "I was surprised at how the market moved after the confidence data Tuesday," said Karen Manna, investment director at Federated Hermes. "We're just biding time until the tier-one data, and that's really the June jobs report."

Earlier, Powell said in prepared remarks before the committee that the uncertain economic impact of President Donald Trump's policies warranted patience, and said that more clarity is needed on whether the impact of Trump's tariffs on inflation could be short-lived or potentially more persistent.

In separate events, New York Fed President John Williams said holding rates steady is "entirely appropriate," while his counterpart in Boston, Susan Collins, said modestly restrictive monetary policy is necessary. Governor Michael Barr was also set to speak Tuesday afternoon.

The remarks from Fed officials came against the backdrop of conflict in the Middle East. Trump on Tuesday accused Israel and Iran of violating a ceasefire, which had helped push oil prices lower and eased concern that higher crude could stoke inflation.

"It is highly unusual that you have this public debate about whether they should be cutting in September or July, especially when the consensus expects year-over-year inflation to go up," said Torsten Slok, chief economist at Apollo.

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