Vanguard Says Maybe the Fed Will Cut Rates Once This Year

Investment and retirement giant Vanguard has been taking a contrarian view of the economy and what is likely necessary to happen. One of those views is that the Federal Reserve might not have the room to make the significant interest rate cuts that so many have suggested are necessary.

Many have thought — exactly the opposite. That higher interest rates were absolutely unnecessary at this point. Much of the faction has been interested in lower interest rates to make more money. Understandable if not necessarily the most solid foundation for monetary theory.

But for the Fed, the question has been more complex. It has tried to guide the economy from higher inflation to a soft landing and is looking for continued economic growth, a reasonably strong labor market, and no recession. That creates two potential dangers. One is to cut rates too soon, allowing a resurgence of inflation and having to start the entire process of correction over again. The other is to cut rates too late and watch the economy tip over into a recession as growth becomes too constrained.

Vanguard’s U.S. economic outlook of July 25, 2024, isn’t so much what the Fed should do, but rather what it can and would do based on how the central bank operates. As the central bank’s chair Jerome Powell and other officials have repeatedly said, they are looking for sufficient evidence over time that the economy has moved closely enough to inflation targets of 2% that progress would continue even if rates were lower. Think of it as bringing a sailboat into a dock. Loosen the sail too soon and the boat drifts without sufficient momentum to reach the dock. Keep it tighter, catching the power of the wind, for too long and you crash into it.

As Vanguard’s economists wrote of their 2024 year-end outlook, “Continued economic growth, labor momentum, and stubborn inflation are likely to leave the Federal Reserve without the confidence it needs to cut interest rates this year.” The conditions that Vanguard posits are 2% year-over-year economic growth; 2.9% year-over-year core inflation, with shelter being one of the factors keeping prices higher for longer; and a 4.0% unemployment rate.

Vanguard admits that continued favorable inflation readings could result in a single rate cut, perhaps as early as September, but says a second cut within the year is unlikely.