BlackRock Fund Manager: The reasons for a Fed rate cut are "already sufficient."

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BlackRock fund managers believe the Fed has sufficient reasons to cut rates, and that bets in the bond market on rate hikes may be premature.

On May 25, Navin Saigal, Global Head of Fixed Income Asia-Pacific at BlackRock, stated that under the leadership of new Fed Chair Walsh, the Federal Reserve actually has enough reason to choose rate cuts rather than hikes.

He also pointed out that accumulating potential pressures in the labor market could shift the policy balance. Behind the economic growth driven by large-scale investments in artificial intelligence lies a long-term concern about machines replacing humans. This may create a drag on the job market over the next year, thus providing grounds for rate cuts or holding steady.

This assessment markedly deviates from the mainstream pricing in the current bond market. Against the backdrop of the U.S.-Iran war boosting inflation expectations and the market almost certain the Fed will raise rates in December, Saigal’s remarks are particularly noteworthy.

Differences between the bond market and BlackRock

The pricing logic in the bond market is currently based on the assumption that Walsh will prioritize maintaining the Fed’s anti-inflation credibility.

Wallstreetcn mentioned that Walsh officially took office as Fed Chair on Friday, May 22. U.S. Treasuries were sold off, and the yield on the rate-sensitive 2-year Treasury rose 4 basis points to a new high since February this year.

Just three months ago, market expectations were pointing toward even larger rate cuts. In a Bloomberg TV interview, Saigal directly addressed this issue. He said:

If I had to choose between rate hikes and rate cuts, I think there are actually enough factors supporting a rate cut.

This aligns with the Trump administration’s policy orientation of pressing for lower rates, but Saigal’s comments are more based on economic fundamentals.

Saigal acknowledges that several "tailwinds" currently exist in the U.S. economy, with the AI investment boom being the most prominent. Companies’ large-scale capital expenditures in the AI sector are supporting the current apparent economic strength.

However, he also cautioned that there is an internal contradiction in this logic: One of the ultimate objectives of AI investment is to replace humans with machines or software, which means the current investment boom could turn into downward pressure on the labor market over the next year.

Saigal said:

Faced with uncertainty over whether the economy is strengthening or weakening, the safest choice may be to hold steady.

In his view, even if the Fed ultimately does not choose to cut rates, the potential fragility of the labor market is enough to cast doubt on a rate hike agenda.

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