Vanguard, the world’s second-largest asset manager, expects the U.S. Federal Reserve to maintain a hawkish stance by either keeping interest rates elevated for longer than what the market is pricing or by tightening monetary conditions even further.
“The economy has shown more resilience than we expected, despite the bank stresses, despite the debt ceiling volatility,” she said in a webinar. “We don’t think they’re going to cut rates any time soon … the Fed may have more work to do.” Fed Chair Jerome Powell said the central bank’s staff expected a noticeable slowdown in economic growth later this year but no longer forecast a recession in 2023, as inflation could come down to target without high levels of job losses.
Higher rates, on the other hand, could exacerbate the anticipated economic slowdown, and even threaten financial stability, she said. “The downside risk … is the Fed overshoots and they drive us into a deeper recession.”