The Fed Won’t Lower Rates as Much as Expected: Vanguard

Vanguard said global inflation has slowed sharply over the past two years and is now approaching 2%, though the path to disinflation has been uneven across countries and regions.

Most developed markets have faced slowdowns driven by monetary policy to reach this point. The United States is an exception, experiencing accelerated economic growth and full employment without noticeable effects from restrictive monetary policy, they noted.

Vanguard’s Outlook

Vanguard explained that U.S. inflation is expected to continue falling next year, potentially reaching 2.5% by the end of 2025. As a result, the Federal Reserve is likely to continue lowering interest rates, “though not by much,” with expectations of a range between 3.75% and 4% by the end of next year.

In the context of restrictive monetary policy, the U.S. economy has benefited from a favorable combination of strong real GDP growth, an easing of an overly tight labor market, and declining inflation, Vanguard said.

In Europe, while inflation is nearing target levels in the eurozone, it has come at the cost of stagnation in 2023 and 2024, driven by weak external demand, low productivity, and the lingering effects of the energy crisis, which continue to weigh on activity.

“We expect the European Central Bank to cut rates below the neutral level, reaching 1.75% by the end of 2025. The era of zero or even negative rates is over,” they explained.

Ignacio Teson

Economist and Financial Analyst

Ignacio Teson is an Economist and Financial Analyst. He has more than 7 years of experience in emerging markets. He worked as an analyst and market operator at brokerage firms in Argentina and Spain.