In a divergence from prevailing market consensus, global asset management giant BlackRock suggests the Federal Reserve, under new Chair Kevin Warsh, may have sufficient grounds to consider interest rate cuts rather than hikes. When questioned about the possibility of rate increases during Warsh's tenure, Nevin Sehgal, BlackRock's Head of Asia Pacific Global Fixed Income, stated: "If you force me to choose between a hike and a cut, I believe there are actually enough factors to support a cut." He added, "Looking ahead, the labor market will face some pressure, which could imply the Fed either holds steady or opts to ease."

Sehgal's remarks contrast sharply with the widespread expectations among bond investors, who largely bet that Warsh will prioritize maintaining the Fed's credibility in combating inflation over acceding to President Trump's calls for lower rates. Concurrently, escalating inflation expectations, fueled by rising fuel and raw material prices amid Middle East conflicts, have bolstered investor bets on the Fed hiking rates to curb inflation. Current pricing indicates the market is nearly certain the Fed will raise rates by December. The yield on the policy-sensitive U.S. two-year Treasury note has climbed from a March low of 3.36% to 4.12% last Friday, reflecting this shift in expectations.

However, in Sehgal's view, while the U.S. economy benefits from certain tailwinds—such as the AI investment boom—the labor market may face future pressures. He noted that the apparent strength of the U.S. economy is partly due to substantial corporate investments in AI, a significant portion of which ultimately aims to replace human labor with machines or software. "When you're uncertain whether the economy will strengthen or weaken over the next year, perhaps the safest course is to do nothing," he said.

Sehgal's core argument for a potential Fed easing window aligns with the views of Kevin Hassett, Director of the White House National Economic Council, though Hassett bases his outlook for Fed rate cuts on falling energy prices. Hassett stated over the past weekend that if a U.S.-Iran agreement to reopen the Strait of Hormuz—a critical global energy transit chokepoint—is finalized, oil prices would drop significantly. Lower energy costs could substantially ease inflationary pressures, ultimately creating more room for the Fed under Warsh to cut rates. Hassett also pointed out that beyond declining energy prices, other disinflationary trends could eventually justify Fed rate cuts. He mentioned "many things putting downward pressure on prices," citing AI-driven productivity gains and an "enormous, unprecedented AI capital expenditure boom."

Despite this, the prevailing market view remains that the Fed will tighten monetary policy. The CME FedWatch Tool shows traders are betting the Fed is highly likely to implement a 25-basis-point rate hike by December. Data released earlier this month confirmed inflationary pressures in the U.S. economy. U.S. inflation accelerated in April, with the Consumer Price Index (CPI) rising 3.8% year-over-year, the fastest pace since 2023, driven by sustained increases in gasoline prices due to the Middle East war and a jump in grocery costs. Simultaneously, the Producer Price Index (PPI) surged 1.4% month-over-month in April, the largest monthly increase since March 2022, far exceeding the 0.5% market expectation. The year-over-year PPI increase reached 6.0%, the highest since December 2022, significantly above the 4.8% forecast.

Meanwhile, the hawkish faction within the Fed is expanding. Last month's FOMC meeting saw the highest level of dissent since 1992, with as many as three officials voting against a policy statement suggesting a dovish bias. Meeting minutes revealed a notable shift toward a more hawkish stance within the Fed, against the backdrop of Middle East conflicts pushing up energy prices and rekindling inflationary pressures. Most officials believed the current high-interest-rate policy might need to be maintained longer than previously expected, and if inflation persists above the 2% target, further rate hikes might even be necessary in the future.

Several Fed officials have recently signaled a hawkish tone. Philadelphia Fed President Paulson, a 2026 FOMC voting member, stated last week that she favors holding rates steady and believes rate cuts would only be appropriate if sustained progress is made in combating inflation. She said, "Current monetary policy is mildly restrictive, and this restrictiveness is helping to dampen inflationary pressures while the labor market remains stable." "Holding rates steady allows us to assess how the economy evolves and the risks to price stability and the labor market." Paulson noted that unemployment has been "remarkably stable," indicating the labor market is "essentially in balance," and inflation was already too high even before Middle East conflicts drove up energy prices. She added, "Assuming the labor market remains in balance, then cuts would only become appropriate after we see sustained progress on inflation."

Fed Governor Waller explicitly stated that the Fed needs to send a clear signal to the market that the probabilities of "hiking" and "cutting" are currently equal in the future interest rate path. Waller warned that if inflation fails to resume its downward trajectory in the near term, he would not rule out the possibility of further rate increases. He also expressed support for removing language in future policy statements that currently implies a "dovish bias." Waller emphasized that the inflation outlook remains the most critical factor determining monetary policy direction. He noted that if long-term inflation expectations show signs of becoming "unanchored," he would not hesitate to support raising the target range for the federal funds rate.

Additionally, Kansas City Fed President Schmid stated that inflation is the biggest risk facing the U.S. economy. Minneapolis Fed President Kashkari said the Middle East war has exacerbated already high inflation, and the Fed must return inflation to its 2% target. Boston Fed President Collins also warned that if inflationary pressures fail to ease, the Fed may need to raise rates again. Chicago Fed President Goolsby pointed out that inflation is moving in the wrong direction, and this misstep is not solely related to oil or tariffs. These officials' emphasis on inflation points to a view that the Fed is "leaving the door open" for potential rate hikes.

Now formally at the helm, Warsh will face his first policy meeting in mid-June, which will serve as a crucial window for investors to observe his policy stance. Market observers note that Warsh assumes leadership as the Fed confronts one of its most complex policy environments in recent years: on one hand, Middle East conflicts are driving up oil prices and reigniting inflationary pressures; on the other, U.S. economic growth is slowing, while Trump continues to demand the Fed cut rates swiftly. As market concerns over inflation intensify, if Warsh's stance leans further toward hawkishness, it could reshape market views, suggesting the Fed may need to raise rates in the coming months or, at best, maintain current rates for an extended period. TS Lombard economists stated, "Given rising inflation risks, not hiking in June would effectively equate to an easing policy."

Analysts point out that the expansion of the hawkish faction within the Fed and inflationary pressures stemming from Middle East conflicts are reshaping expectations for U.S. monetary policy. Although Warsh himself has expressed a desire to achieve rate cuts while controlling inflation, the current internal Fed climate has clearly shifted from "when to cut" to "whether to hike again."