On April 22, 2024, Vanguard's global chief economist expressed the view that the Federal Reserve needs to adopt a tighter and more aggressive monetary policy. The economist argues that the current loose policy is contributing to rising inflation and asset bubbles. To address these concerns, he suggests that the Fed should raise interest rates and reduce its bond-buying program. He also emphasizes the importance of clear communication from the Fed to avoid market volatility. The economist believes that a proactive approach is necessary to prevent future economic imbalances [eb1e9774].
This perspective from Vanguard's global chief economist contrasts with the revised interest rate forecast announced by Vanguard just a month earlier. In March 2024, Vanguard's chief economist, Roger Aliaga-DÃa, stated that the US economy has proved far more resilient than expected, and the company predicted stronger growth, a sturdy labor market, and stubborn inflation. The revised forecast indicated a more positive outlook for the US economy and suggested a cautious approach from the Fed towards rate cuts [4483c1da] [c23c3a9e].
However, Vanguard's global head of rates expects less aggressive Federal Open Market Committee (FOMC) rate cuts due to global risks of a rebound in price pressures and signs of stubborn inflation in the US. Vanguard's base scenario is for a 'deferred landing' for the US economy, with continued economic growth and higher inflation than the Federal Reserve wants, but not high enough for interest rate hikes. Vanguard also warns of tail risks such as a rebound in inflation or weakening economic growth. The firm also warns of fiscal profligacy if either of the presidential candidates campaigns on a platform of fiscal expansion [e74127ca].
Vanguard executive Roger Hallam recommends increasing inflation protection in investment portfolios due to recent U.S. data and global risks of a rebound in price pressures. Middle East tensions could lift transportation costs and oil prices, making the strategy attractive for international investors. Vanguard's base scenario is for a 'deferred landing' for the U.S. economy, with continued economic growth and higher inflation but not high enough for the Federal Reserve to hike interest rates again. However, there are 'tail risks' such as a rebound in inflation or weakening economic growth. Vanguard expects inflation and economic growth to continue driving Treasury yields in the next few months, but concerns over the U.S. government deficit and debt burden could gain prominence ahead of the U.S. presidential election in November [3925f824] [eb1e9774] [4483c1da] [c23c3a9e] [e74127ca] [25901a4b].
According to Vanguard's latest research, artificial intelligence (AI) is expected to be the next general-purpose technology (GPT) that will drive above-trend economic growth. The research suggests that technology has consistently been a driver of growth, interest rates, inflation, and stock market valuations. Vanguard's outlook for financial markets includes projections for major asset classes. The research also indicates that inflation in the US is not yet on a sustainable path towards the Federal Reserve's 2% target. However, the US consumer is expected to remain resilient and be a catalyst for growth. The Bank of Canada may begin a rate-cutting cycle next month depending on the pace of inflation. The European Central Bank (ECB) is expected to cut rates three times this year. China's economy is projected to have around 5% GDP growth in 2024, but weak credit data and pressure on the property sector raise concerns. The Reserve Bank of Australia (RBA) is expected to be one of the last central banks in developed markets to cut rates. Central banks in Latin America are closely monitoring inflation and US policy rates. Vanguard forecasts below-trend GDP growth for emerging markets in 2024 [e5c935aa] [25901a4b].
Vanguard's proprietary data suggests that the overall U.S. hires rate is trending higher, particularly for workers earning less than $55,000. The hires rate reached 2.8% in April 2024, the highest level since October 2022. However, the Job Openings and Labor Turnover Survey (JOLTS) shows a downward trend in the hires rate. Hiring activity has been stronger for low-income workers compared to higher-income workers. Hiring rates have also increased for younger workers, while remaining flat for older workers. The trend of increased hiring for lower-income workers is expected to boost consumer spending and support GDP growth in the second half of 2024 [3393ac70].
The U.S. economic growth halved in 1Q from the previous quarter. Inflation has shown renewed strength, and market expectations for Fed rate cuts have plummeted from seven to barely two rate cuts by the end of 2024. Risk assets have continued to deliver positive gains, but their upward trajectory has been interspersed with occasional pullbacks. The economic activity is cooling, with pockets of weakness in the consumer and signs of rebalancing in the labor market. While lower-income households are showing strains, middle- and higher-income households remain in good shape. The timing of the first Fed rate cut remains uncertain, but recent consumer and labor market survey data suggest that the next policy move will be a cut, not a hike. The economy's underlying strength, geopolitical tensions, and several structural drivers argue against a meaningful drop in inflation. This is shaping up to be a short and shallow cutting cycle, with rates very unlikely to approach the zero bound. [8bcc3ab1]