Kevin Warsh was sworn in as Federal Reserve Chair last Friday, and the bond market wasted no time pricing in what it expects next: a rate hike before December. Just three months ago, traders were betting on cuts. The reversal has been sharp — and BlackRock thinks the market has it wrong.

The contrarian call from BlackRock

In a Bloomberg interview, Navin Saigal, BlackRock's Head of Global Fixed Income for Asia Pacific, argued the case for a cut is actually stronger than the case for a hike. "If you forced me to choose between hiking and cutting rates, I believe there are actually enough factors supporting a rate cut," Saigal said. He pointed to potential weakness in the labor market as the more likely catalyst, with the Fed's realistic options now being to hold steady or pivot toward cuts.

His logic ties back to AI. While AI-related investment is propping up the economy, Saigal noted the underlying idea — substituting technology for labor — could eventually pressure jobs. Without clearer economic signals over the next year, his view is blunt: "The safest course of action may be to hold off on making moves."

Why the market is leaning the other way

Middle East tensions, especially the Iran conflict, have pushed up fuel and commodity prices, lifting inflation expectations. Combined with resilient U.S. data and an AI-fueled stock rally, investors are increasingly worried inflation could stay above the Fed's 2% target for longer than expected.

Treasury yields have repriced fast last week:

• U.S. 2-Year Treasury Notes Yield jumped from a March low near 3.4% to briefly hit 4.12% on Tuesday — its highest in over a year and nearly 40 basis points above the upper bound of the federal funds target range.
• U.S. 30-Year Treasury Bonds Yield briefly surged to 5.20% on Tuesday — its highest since July 2007 — before settling near 5.08% by Friday.

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Inside the Fed, signals are turning hawkish

Christopher Waller, a Fed governor previously seen as one of the more dovish voices on the board, used a Frankfurt speech on Friday to call for removing the Fed's "easing bias" language entirely, saying he "can no longer rule out rate hikes further down the road if inflation does not abate soon." He stopped short of advocating an immediate hike, but added bluntly: "Inflation is not headed in the right direction." Vice Chair Philip Jefferson and NY Fed President John Williams are scheduled to speak this week. Trump, for his part, said he hopes Warsh will lead the Fed independently — even while continuing to publicly push for lower borrowing costs.

But the bar for hikes may still be high

Not everyone is convinced a hike is imminent. Chitrang Purani, portfolio manager at Capital Group, has shifted toward short-term U.S. Treasuries but cautioned: "I do believe that the bar to hiking rates is still reasonably high because this Fed and Warsh may want to be a little bit more patient before taking that next step to fully understand how inflation is translating into labor markets and financial conditions." He doesn't expect Warsh to materially change how the Fed reads economic data.

What to watch this week

Beyond Fed speakers, attention turns to auction results for U.S. 2-Year Treasury Notes Yield, U.S. 5-Year Treasury Notes Yield, and U.S. 7-Year Treasury Notes Yield — key signals for shifts in investor demand and where the rate path goes from here.