By Davide Barbuscia
NEW YORK (Reuters) – The Federal Reserve will likely hesitate to cut interest rates next year for fears of a rebound in inflation, but by keeping interest rates high for long it will reduce the chances of a U.S. economic soft landing, an executive at Vanguard said
The world’s second-largest asset manager expects a mild U.S. recession in 2024 which will prompt the Fed to start cutting interest rates at some point in the second half of next year, Roger Aliaga-Diaz, global head of portfolio construction at Vanguard, told Reuters on Thursday.
While economic data would currently point to a so-called soft landing, which is a scenario in which inflation comes down without a recession, fears that price pressures could rise again are likely to prompt the Fed to keep interest rates high for longer than they should, he said.
“The risk of the Fed is asymmetric: the risk of cutting too early and inflation flaring up is much worse than the risk of staying higher and going into a mild recession,” he said.
Data showing that consumer spending and inflation rose moderately last month provided more evidence that the Federal Reserve could cease hiking interest rates, backing recent moves in financial markets that have cheered the likely end of the most aggressive U.S. tightening cycle in four decades.
Traders are betting that the Fed will hold interest rates steady for three more meetings before starting to cut interest rates in May – earlier than previously expected.
Vanguard, which manages $7.6 trillion in assets, expects gross domestic product growth next year to be 0.5%, with one or two quarters of negative growth. The Fed will likely cut rates by 100 to 150 basis points next year, said Aliaga-Diaz.
In coming meetings, the central bank will likely keep interest rates on hold but it will keep open the possibility of additional hikes, he said.
“The reputation risk for them is so big … they don’t want to do a victory lap too early,” he said
(Reporting by Davide Barbuscia)
