Vanguard, the world's second-largest asset manager, expects the 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.
Global Head of Fixed Income Group Sara Devereux said on Thursday the probability of another interest rate increase by the Fed this year stood at 50%. Beyond that, the U.S. central bank was likely to maintain a "hawkish hold" on rates.
Fed funds futures traders on Thursday were pricing for rate cuts in the first half of 2024 after the Fed raised interest rates by 25 basis points on Wednesday and left open the possibility of further hikes this year depending on incoming data on the labor market and inflation. Vanguard, which manages $8 trillion in assets, said its base case scenario remained for a shallow recession in 2024 as higher interest rates hit the economy. Devereux said there were risks to the upside, with the economy showing even more resilience than expected, which could lead the Fed to resume hiking rates.
Devereux said she had an "up-in-quality tilt" for bonds expected to rally in case of a recession such as Treasuries, municipal bonds and agency mortgage-backed securities.
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