Peak interest rates above 6%? Vanguard: The Federal Reserve may need to raise interest rates 1-3 times.

Vanguard, the mutual fund giant, has stated that the Federal Reserve may need to continue raising interest rates beyond the expectations of many policymakers and maintain borrowing costs at a high level until the end of 2024.

As of August, Vanguard manages $8.1 trillion in assets.

Why the possibility of further rate hikes?

Joseph Davis, Chief Global Economist and Head of Vanguard, pointed out that one important reason the Federal Reserve may need to raise rates one to three more times is the significant increase in the neutral interest rate since the 2007-2009 economic recession.

The neutral interest rate refers to the level of monetary policy that neither stimulates nor restricts economic growth. The higher the neutral interest rate, the tighter the Federal Reserve's policy must be to have a meaningful impact on the economy and inflation.

Davis's view is more hawkish than that of most officials on the Federal Open Market Committee (FOMC), who expect only one more rate hike this year and then a rate cut starting in 2024.

After the Federal Reserve decided to pause rate hikes, the federal funds rate target remained between 5.25% and 5.5%, reaching a 22-year high. Davis's comments suggest that borrowing costs could rise to 6% or slightly higher, a view supported by only one member of the FOMC.

Trading on the significance of Federal Reserve policy is not meaningful

Davis also believes that there is a 70% chance of the United States entering a recession in the next 18 months, stating, "A soft landing is still possible, but in our view, it is unlikely."

Todd Schlanger, Senior Investment Strategist at Valley Forge, said, "Market timing is extremely difficult, even for professional investors. As an investment portfolio strategy, it is destined to fail."

According to Vanguard, chasing performance and reacting to headline news is a failed strategy that often leads to buying high and selling low.

Vanguard's research shows that "over a 25-year period, even if investors successfully predict economic surprises 100% of the time, their annualized return would only be 0.2 percentage points higher than a traditional balanced portfolio of 60% US stocks and 40% US bonds."