Vanguard Warns Market Overestimates Fed Rate Cuts as AI Investment Boosts Growth Outlook

Vanguard's analysis suggests traders are pricing in excessive Federal Reserve rate cuts, with markets anticipating three to four reductions before 2026—a scenario the firm deems unrealistic. Sara from Vanguard emphasized to the Financial Times that current expectations are overly reliant on monetary easing, noting rates may reach a neutral level by mid-2025, constraining further cuts.

The Fed remains divided on policy direction amid mixed signals from labor market softness and persistent inflation. Hopes for a December rate cut have dimmed, contributing to recent stock market declines as investor Optimism wanes.

Vanguard revised its U.S. GDP forecast upward to 1.9% for 2025 and 2.25% for 2026, driven by surging AI investment. "AI capital spending is growing at a blistering pace," Sara noted, highlighting an 8% jump this year that prompted significant forecast adjustments. This AI-driven growth could limit the Fed's capacity for policy easing.