• While the US economy continues to surprise, we expect the Fed to remain cautious.
  • Faced with persistent inflation above its 2% target, we believe that the Fed will move cautiously towards its first rate cut.
  • At Vanguard, we have upgraded our US economic forecasts based on stronger growth and a sturdy labour market.

"Our updated economic forecasts anticipate stronger growth, a sturdy labour market, stubborn inflation and a Fed that will move very cautiously towards its first interest rate cut, including the possibility of not being able to cut interest rates at all this year.”

Roger Aliaga-Díaz

Vanguard Chief Economist for the Americas and Global Head of Portfolio Construction

The Goldilocks outcome of strong growth and lower inflation in the US was achieved by a timely expansion in the supply side of the economy - mainly better-than-expected gains in the workforce and productivity. This explains our updated economic forecasts anticipating stronger growth, a sturdy labour market, stubborn inflation and a central bank that will move cautiously towards its first interest rate cut. We also consider the possibility of the Fed not being able to cut interest rates at all this year.

Given that interest rates last year were aimed at subduing inflation by restricting economic activity, we would not have expected GDP growth as robust as 3% in 2023. Stronger-than-expected labour supply and productivity gains more than offset the US Federal Reserve’s (Fed) aggressive monetary policy tightening. These favourable supply-side forces (the production of goods and services to drive economic growth) are likely to subside only gradually, boosting our outlook for 2024. We foresee economic growth of around 2% for 2024 and a year-end unemployment rate of around 4%.

Meanwhile, we expect demand to persist. As the economy remains resilient and with strong underlying demand, we continue to see the “last mile” of the inflation fight as the most difficult. We believe that the core Personal Consumption Expenditures price index, the Fed’s preferred measure of inflation, won’t follow a smooth path toward the Fed’s 2% goal, with the risk of staying above 2.5% for the year, higher than previously anticipated (core inflation excludes volatile food and energy prices).

The Fed will likely remain cautious

Faced with persistent inflation above its 2% target and the risk of financial conditions easing too rapidly, we believe that the Fed will move cautiously towards its first interest rate cut. Moreover, it’s entirely possible that the Fed may not be in a position to cut interest rates this year and will maintain its federal funds rate target around its current range of 5.25%–5.5% for the rest of 2024.

But a “soft-landing” scenario with moderate Fed interest rate cuts can’t be ruled out. If strong supply-side forces were to persist in 2024, that would likely create conditions in which inflation returned to the Fed’s target at a faster pace without weakening economic growth or the labour market.

In that case, supply-side tailwinds would help the Fed achieve the coveted soft landing. Because Fed policy doesn’t control the supply side of the economy, such a soft landing would be a welcome and lucky outcome. At the other end of the spectrum, a late-year recession—while no longer our base case—is still possible. We believe it could occur now only if favourable supply-side forces were to subside more quickly than anticipated.

A return to sound money still applies

The developments continue to underscore our view that we have entered an era of “sound money” with interest rates above the rate of inflation. Having a balanced and diversified investment portfolio is always important. Sound money provides a solid foundation for long-term risk-adjusted returns.


Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Important information

For professional investors only (as defined under the MiFID II Directive) investing for their own account (including management companies (fund of funds) and professional clients investing on behalf of their discretionary clients). In Switzerland for professional investors only. Not to be distributed to the public.

The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions.

The information contained herein is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

Issued in EEA by Vanguard Group (Ireland) Limited which is regulated in Ireland by the Central Bank of Ireland.

Issued in Switzerland by Vanguard Investments Switzerland GmbH.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

© 2024 Vanguard Group (Ireland) Limited. All rights reserved.

© 2024 Vanguard Investments Switzerland GmbH. All rights reserved.

© 2024 Vanguard Asset Management, Limited. All rights reserved.

Vanguard economic and market outlook for 2024

Explore our outlook resources to find out what a return to sound money means for clients.