As interest rate hike expectations rise, BlackRock openly "sings a different tune": Labor market pressures are mounting and under Powell, the Fed has sufficient reasons to cut interest rates.

Global asset management giant BlackRock has put forward a view contrary to the current market consensus, suggesting that under the leadership of the new Fed Chairman Kevin Wash, the Fed may have enough reasons to choose to cut interest rates instead of raising them. Naveen Segal, global fixed income head of BlackRock in the Asia-Pacific region, when asked about the possibility of raising interest rates under Wash's tenure, said: "If you ask me to choose between raising interest rates and cutting interest rates, I think there are already enough factors supporting a rate cut." He added, "Looking at the future prospects, the labor market may face some pressure, which could mean that the Fed either stays put or chooses to cut interest rates." Segal's remarks starkly contrast with the general expectations of bond investors. Bond investors are betting that Wash will prioritize maintaining the Fed's reputation in fighting inflation rather than catering to President Trump's calls for lower interest rates. Meanwhile, against the backdrop of rising fuel and other raw material prices due to the Middle East conflict, expectations of inflation heating up have further bolstered investors' bets on the Fed raising interest rates to contain inflation. Current pricing shows that the market is almost certain that the Fed will raise rates before December. The yield on the two-year U.S. Treasury bond, which is sensitive to changes in monetary policy, has risen from a low of 3.36% in March to 4.12% last Friday, reflecting this shift in expectations. However, in Segal's view, while the U.S. economy has some "tailwinds" such as the AI investment boom, the labor market may face pressure in the future. He pointed out that while the U.S. economy currently appears strong, part of the reason is that companies are investing heavily in AI, with a significant portion of that investment ultimately aimed at replacing human labor with machines or software. He said, "In a situation where we can't be certain whether the economy will strengthen or weaken in the next year, perhaps the safest thing to do is nothing." Segal's core view on the potential for the Fed to cut rates aligns with that of White House National Economic Council Director Kevin Hassett, but Hassett's view on the prospect of a rate cut by the Fed is based on the decline in energy prices. Hassett said over the weekend that if an agreement to reopen the Strait of Hormuz, a global energy transit chokepoint, between the U.S. and Iran is reached, oil prices will drop significantly, and lower energy costs could significantly ease inflation pressures, creating more space for a rate cut under Wash's leadership. Hassett also mentioned that besides the decline in energy prices, other anti-inflation trends could ultimately make a rate cut by the Fed reasonable. He said, "There are many things exerting downward pressure on prices," and mentioned AI-driven productivity gains and a "massive and unprecedented boom in AI capital spending." Expectations for Fed rate hikes continue to rise Currently, the mainstream view in the market is still that the Fed will tighten monetary policy. CME Group's "FedWatch" tool shows that traders are betting that the Fed is likely to raise interest rates by 25 basis points before December. Data released earlier this month confirmed the inflation pressures facing the U.S. economy. Influenced by the ongoing rise in gasoline prices due to the Middle East conflict and the jump in food and grocery costs, U.S. inflation continued to accelerate, with the Consumer Price Index (CPI) rising 3.8% year-on-year in April, the fastest pace since 2023. At the same time, the Producer Price Index (PPI) in the U.S. soared 1.4% month-on-month in April, the largest monthly increase since March 2022, significantly exceeding market expectations of 0.5%; and rose 6.0% year-on-year, the highest level since December 2022, well above the market's expected 4.8%. Meanwhile, the hawkish camp within the Fed is expanding. The FOMC meeting last month saw the highest level of dissent since 1992, with as many as three officials voting against a policy statement that signaled a dovish bias. The meeting minutes show that in the context of the Middle East conflict pushing up energy prices and inflation pressures heating up again, the internal stance of the Fed is clearly shifting towards a more hawkish position. Most officials believe that the current high interest rate policy may need to be maintained for a longer period than previously expected, and further rate hikes may be necessary in the future if inflation remains above the 2% target. Several Fed officials have recently sent hawkish signals. Mary Paulson, president of the Federal Reserve Bank of Philadelphia and a 2026 FOMC voting member, said last week that she favored keeping rates unchanged and believed that only if progress in fighting inflation continued would it be appropriate to cut rates. She said, "The current monetary policy is mildly restrictive, and this restrictiveness is helping to suppress inflation pressures while the labor market remains stable." "Maintaining rates unchanged can allow us to assess how the economy is evolving, as well as the risks facing price stability and the labor market." Paulson pointed out that the unemployment rate has been "exceptionally stable," indicating that the labor market is "basically in balance," and even before the Middle East conflict raised energy prices, inflation levels were already too high. She added, "Assuming the labor market continues to remain balanced, only when we see continued progress in fighting inflation, would cutting rates be appropriate." Fed Governor Waller has made it clear that the Fed needs to send a clear signal to the market that the probabilities of "raising rates" and "cutting rates" are currently completely equal in the future rate path. Waller warned that if inflation cannot return to a downward trajectory in the short term, he would not rule out the possibility of further rate hikes in the future. He also supported removing language in future policy statements that implies a dovish bias. Waller emphasized that the outlook for inflation remains the most crucial factor in determining the direction of monetary policy. He noted that once there are signs of "unanchored" long-term inflation expectations, he would not hesitate to support raising the federal funds target range. In addition, Kansas City Fed President Schmidt said that inflation is the biggest risk facing the U.S. economy. Minneapolis Federal Reserve Bank President Kashkari said that the Middle East conflict has exacerbated already high inflation, and the Fed must bring inflation rates back to the 2% target. Boston Fed President Collins also warned that if inflation pressures fail to ease, the Fed may need to raise rates again. Chicago Fed President Gulsby pointed out that inflation is moving in the wrong direction, and this misdevelopment is not only reflected in oil-related aspects, but also not only related to tariffs. These officials' emphasis on inflation all points to one view, that the Fed is opening the door to possible rate hikes. Now that Wash has officially taken the helm of the Fed, his first interest rate meeting after taking office in mid-June will be an important window for investors to observe his policy stance. Market observers point out that Wash is taking over the Fed in one of the most complex policy environments in recent years: on the one hand, the Middle East conflict is driving up oil prices and reigniting inflation pressures; on the other hand, U.S. economic growth is slowing down, while Trump continues to demand that the Fed cut rates as soon as possible. With growing concerns in the market about inflation, if Wash's stance tilts further towards hawkishness, it could further reshape market expectations that the Fed may need to raise rates in the coming months, or at best, maintain the current level of interest rates for a longer period of time. TS Lombard economists said, "Given the rising inflation risks, if there is no rate hike in June, it is actually equivalent to a dovish policy." Analysts point out that the expanding hawkish camp within the Fed and the inflation pressures brought about by the Middle East conflict are reshaping market expectations for U.S. monetary policy. While Wash himself has expressed his hope to control inflation while cutting rates, the internal atmosphere at the Fed has clearly shifted from "when to cut rates" to "whether there is a need to raise rates again."