Vanguard, the mutual fund firm with $8.1 trillion in managed assets as of August, recently suggested that the Federal Reserve might need to extend its interest rate hikes beyond current expectations. The firm indicated on Wednesday that elevated borrowing costs could persist until late 2024 due to a significant rise in the neutral interest rate since the economic recession of 2007-2009.
Joseph Davis, Vanguard’s chief global economist and leader of the Investment Strategy Group, highlighted the substantial rise in the neutral interest rate as a key factor necessitating additional hikes by the central bank. The neutral rate of interest is a monetary policy level that neither stimulates nor restricts economic growth.
Following the central bank’s recent pause in hiking rates, Davis proposed that one to three more increases might be needed. This suggestion comes amidst an uncertain economic landscape where the future trajectory of interest rates remains unclear.
In summary, Vanguard’s evaluation indicates that the Federal Reserve’s monetary policy may need to remain stringent for a longer period than anticipated. The substantial rise in the neutral rate of interest post the 2007-2009 recession could be a primary driver of these potential extended borrowing costs until the end of 2024.
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