An overly cautious Fed could lead to a slight recession in the US in 2024

The Federal Reserve will likely hesitate to cut interest rates next year for fear of a spike in inflation, but keeping them elevated for a long time will reduce the chances of a soft landing for the U.S. economy, a Vanguard executive said.

The world’s second-largest asset manager expects a mild recession in the United States in 2024, prompting the Fed to start cutting rates sometime in the second half of next year, Roger Aliaga-Díaz told Reuters on Thursday. , global head of portfolio construction at Vanguard.

While economic data currently points to a so-called soft landing, which is a scenario in which inflation falls without a recession, fears that price pressures will rise again are likely to prompt the Fed to maintain the high rates for longer than they should, he said.

“The risk of Fed It is asymmetric: the risk of cutting too soon and causing inflation to skyrocket is much worse than the risk of keeping inflation higher and entering a mild recession.“, he claimed.

Data showing consumer spending and inflation rose moderately last month provides further evidence that the Fed may stop raising rates, supporting recent moves in financial markets that have hailed the likely end of the cycle. of the United States’ most aggressive tightening in four decades.

The operators are betting that the Fed will hold rates steady for three more meetings before starting to cut them in May, ahead of schedule.

Vanguard, which manages $7.6 trillion in assets, expects gross domestic product growth next year to be 0.5%, with one or two quarters of negative growth. According to Aliaga-Díaz, the Fed is likely to cut rates by between 100 and 150 basis points next year.

In upcoming meetings, the central bank will likely maintain rates but leave open the possibility of further hikes, he said. “The reputational risk for them is so great (…) that they do not want to declare victory too soon“, he claimed.