Huitong Finance APP News – Mutual fund giant Vanguard, which has $8.1 trillion in assets under management, said the Federal Reserve may need to continue to raise interest rates more than many policymakers expect and keep borrowing costs at higher levels until the end of 2024. .
Joseph Davis, chief global economist and head of Vanguard’s investment strategy group, pointed out that the sharp increase in the neutral interest rate since the recession of 2007 to 2009 is an important reason why the Federal Reserve may need to raise interest rates one to three times again. The neutral interest rate refers to the level of monetary policy that neither stimulates nor inhibits economic growth. The higher it is, the more Fed policy needs to tighten to have a meaningful impact on the economy and inflation.
Davis’s views are more hawkish than those of most Federal Open Market Committee (FOMC) officials involved in policymaking. These officials expect only one more rate hike this year before starting to cut rates next year. The federal funds rate target remains between 5.25% and 5.5%, the highest level in 22 years, after the Fed decided on Wednesday to pause raising interest rates, and Davis’ comments mean borrowing costs could rise to 6% or higher. Only one FOMC member shared this view.
Davis also said he believed there was a 70% chance the U.S. would fall into a recession within the next 18 months, saying: “In our view, a soft landing is still possible but unlikely because it would require an unlikely outcome.” “Painless deflation process,” in which inflation returns to the Fed’s 2% target without slowing demand in the world’s largest economy.
Hours before the Fed’s policy announcement on Wednesday, Vanguard issued a separate statement advising investors to avoid reacting to headlines and emphasizing the benefits of a balanced portfolio.
“Market timing is extremely difficult, even for professional investors, and it is doomed to fail as a portfolio strategy,” said Todd Schlanger, senior investment strategist at Vanguard, based in Virginia Valley, Pa. ) said in a statement on Wednesday. “In Vanguard’s view, chasing performance and reacting to headlines are losing strategies that often result in buying high and selling low.”
Vanguard’s research shows that “over a 25-year time span, even if investors successfully predicted economic surprises every time, their annualized returns would be only better than a traditional balance of 60% U.S. stocks and 40% U.S. bonds. The portfolio was 0.2 percentage points higher.”
Over the years, the term 60/40 has expanded to include a range of other balanced allocations, such as a 70/30 or 80/20 mix of stocks and bonds.
U.S. stocks closed lower on Wednesday after the Federal Reserve released a policy update. At the same time, the 2-year Treasury yield rose to its highest closing level since July 18, 2006.
