Vanguard Group "Singing a Different Tune": The Federal Reserve may not cut interest rates this year!

Investors are hoping that the Federal Reserve will start cutting interest rates as early as September. However, Vanguard Group does not think so.

As one of the world's largest asset management companies, Vanguard Group does not fully believe that the Federal Reserve will cut interest rates in 2024. While the company believes there may be a rate cut in December, it does not expect any action next month.

Roger Aliaga-Diaz, Chief Economist for the Americas at Vanguard and Head of Global Portfolio Construction, said, "If there is a rate cut, it will be in December. To be honest, we are almost between no rate cut and one rate cut... It's a very close call."

This stance is contrary to most of Wall Street's views. According to CME FedWatch data, the futures market almost unanimously expects the Federal Reserve to cut rates by 25 basis points in September.

Most traders believe there will be at least three 25 basis point rate cuts by the end of 2024. Over 90% of people expect at least two rate cuts. As the Federal Reserve concludes its July meeting, investors will be looking for more clues about the Fed's intentions.

Vanguard Group, known for resisting short-term market trends, stated that other market observers have been distracted by some recent economic reports, which will ultimately only be statistical noise. In addition, Wall Street forecasters have also made mistakes in the past. Last December, futures data indicated that rate cuts would almost certainly begin this spring. However, inflation has been more stubborn than expected, and the federal funds rate has remained unchanged.

The Federal Reserve itself has also changed its rate expectations. In March, policymakers collectively predicted three rate cuts in 2024. By June, the median forecast was reduced to one cut.

Aliaga-Diaz stated that the market is once again overly optimistic about inflation, with too little reliable evidence. For example, the recently released core Personal Consumption Expenditures (PCE) price index for June showed apparent progress: prices rose 2.6% year-on-year and 0.2% month-on-month.

However, Aliaga-Diaz believes that "a more difficult year-on-year growth rate" is coming, and with housing prices still soaring, observers should remain cautious. He said, "We have very low inflation readings, but it's hard to sustain."

A similar situation is also seen in the unemployment rate. A slowing job market may be a reason for the Federal Reserve to cut rates, as this could stimulate employment. Although the unemployment rate recently rose to 4.1%, up from its lowest point in half a century at 3.4%, Aliaga-Diaz does not see this as a trend.

He said, "We believe this is all driven by the supply side, especially immigration factors, and we have not seen massive layoffs." Therefore, he expects the unemployment rate to stabilize around the current level of 4.1% All of this means to investors that there may be additional risks in the stock market that already seems to have priced in rate cuts. This is especially true for large tech stocks, with Alibaba Diaz believing that even after recent price declines, these stocks are still overvalued. In fact, Vanguard Group expects the annualized return on US stocks over the next decade to be only 3.4% to 5.4%.

However, there is a silver lining: despite Vanguard Group's lukewarm outlook on the stock market, the company is more optimistic about bonds. Alibaba Diaz stated that when the Fed cuts rates, the magnitude of these cuts may be relatively small, helping investors earn more from their bond portfolios. "The time when US bond yields will remain at higher levels and provide more returns."