Vanguard Group "pours cold water": The Federal Reserve may only cut interest rates once this year!

Vanguard Group stated that the Federal Reserve may only cut interest rates once this year, as housing costs are too high and the job market remains overheated.

The asset management company expects the Fed to cut rates by 25 basis points in September, which is far below the market's more aggressive rate cut forecasts. According to the CME Group's FedWatch Tool, investors anticipate the Fed may cut rates three times this year.

In response, Vanguard Group mentioned that investors may ultimately be disappointed and pointed out key issues in the U.S. economy that will make it difficult for the Fed to significantly ease monetary policy.

Despite the cooling of the U.S. job market from the strong conditions seen in 2021 and 2022, overall hiring trends remain robust. "The U.S. added 206,000 jobs last month, exceeding expectations, while wage growth only slightly dipped to 3.9%," Vanguard Group's senior economist Josh Hirt stated in a report earlier this month.

Meanwhile, although the unemployment rate rose to 4.1% in June, it remains close to its lowest level since the 1960s. Hirt mentioned in a report earlier this month:

"The Fed is looking for reasons to cut rates, but it also cannot ignore that cutting rates too early, especially considering the strong labor market and wage growth, could reignite inflation."

Inflation itself remains above the target level, posing a hurdle for the Fed in deciding the extent of policy easing this year. U.S. June CPI data rose 3% year-on-year, still above the Fed's 2% target.

At the same time, the Fed's preferred core PCE price index had a year-on-year growth rate of 2.6% in May. Vanguard Group predicts that this index will rise to 2.9% by the end of this year, but the Fed may want to see core PCE inflation drop below 2.5% before considering rate cuts.

Hirt mentioned that inflation is largely being driven by rising housing costs. According to Fed data, housing costs in the average U.S. city hit a record high, growing 5% year-on-year in June.

Vanguard Group stated that housing inflation appears to be "sticky," with housing prices expected to continue growing at a rate of around 0.4% per month.

In its outlook for the second half of this year, the company stated, "If the Fed decides to cut rates in 2024, we expect it to be no more than once, with a magnitude not exceeding 25 basis points. It faces a delicate balance between cutting rates too quickly leading to a resurgence of inflation and cutting rates too late harming the economy."

After a series of high inflation data crushed market expectations for optimistic rate cuts at the beginning of 2024, other rate forecasters have lowered their expectations for Fed easing this year.

Regarding the Fed's interest rate meeting next week, the CME Group's FedWatch Tool shows that the market expects the Fed to almost 100% choose to keep rates unchanged