In short, explains Josh Hirt, a Vanguard senior economist, “Monetary policy is still working its way through the economy, trying to constrain activity even as the impacts of supportive fiscal policy have kicked in. This is one of the reasons we believe the economy faces a period of higher sustained interest rates than we’ve grown accustomed to seeing.” Vanguard believes that the Federal Reserve may need to raise rates further and keep them at their highest levels for an extended period in the face of continued economic resilience.
Recent Vanguard research concludes that the “neutral rate of interest”—a theoretical rate that neither promotes nor restricts economic activity—is higher than many may have thought. That finding and our related policy analysis support our view that the Fed may need to raise its federal funds target rate by a further 25–75 basis points before ending a rate-hiking cycle that began in March 2022 and has totaled 525 basis points. (A basis point is one-hundredth of a percentage point.) The Fed’s rate target currently stands at 5.25%–5.5%. We don’t foresee the central bank cutting its target until the second half of 2024.
The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of September 13, 2023.