Vanguard doesn’t believe the Fed will cut interest rates this year

Vanguard doesn’t expect the Federal Reserve to cut interest rates this year, defying the view from Fed officials that the central bank remains on track to reduce rates three times in 2024.

The Fed on Wednesday left interest rates unchanged for the fifth consecutive time, as expected, keeping its benchmark overnight borrowing rate in a range between 5.25%-5.5%.

It also said it still expects three quarter-percentage point cuts by the end of the year.

The message fueled a market rally in both the U.S. and beyond. The three major stock market indexes in the U.S. all closed at record highs Wednesday, while in Europe, the pan-European Stoxx 600 rose to a fresh record high on Thursday morning as investors cheered the prospect of multiple rate cuts.

Traders are currently pricing in a roughly 68% chance of a first Fed rate cut in June, according to the CME FedWatch Tool.

Top U.S. asset manager Vanguard, however, isn’t convinced.

Its base case is no rate cuts by the Federal Reserve in 2024, and Shaan Raithatha, senior economist at Vanguard, said this could have ramifications for central banks — and markets — around the world.

“As you all know, rate cuts have already been priced down from seven rate cuts at the start of the year to three,” Raithatha told CNBC’s “Squawk Box Europe” on Thursday.

“So, it depends on the reason why. … If it is because of the strong economy, especially supply-side driven growth, which is also disinflationary, then perhaps the stock market can continue that rally. But also at Vanguard, what we also believe is that the U.S. equity market is relatively overvalued at this stage.”

Vanguard isn’t alone in raising the possibility of zero rate cuts from the Fed this year.

Mark Okada, co-founder and CEO of Sycamore Tree Capital Partners, told CNBC’s “Closing Bell” last week that there’s a “good chance” the central bank doesn’t reduce rates in 2024.

“We are in the higher-for-longer camp,” Okada said on March 12.

Forecasters in the CNBC Fed Survey, meanwhile, have said that they still expect to see three interest rate cuts from the Fed in 2024, on average.

With regard to when other central banks will start cutting rates, Raithatha said, “there is a bit of cat and mouse going on here.”

“I think everyone is slightly afraid to go before the Fed. The [Swiss National Bank] is clearly the exception, but the inflation problem is slightly different there,” he added.

The Swiss National Bank surprised markets on Thursday by lowering its main policy rate by 0.25 percentage point to 1.5%. The move makes Switzerland the first major economy to cut interest rates in a sign of growing policymakers’ confidence in the battle to tame inflation.

“I would say the key thing for the [European Central Bank] is what happens to the euro. Currently, markets are pricing in a fairly similar path for the Fed and for the ECB. We take a slightly different view to that.”

He said that if the Fed does hold rates steady in 2024, “and the ECB does cut, that raises questions as to what happens to the euro.”

“The euro may depreciate, we don’t know by how much, but if you get the euro say going towards parity, maybe that’s an extreme assumption, then that clearly raises inflationary concerns further down the line,” Raithatha said.

The euro traded 0.1% lower at $1.0909 at around 11:40 a.m. London time on Thursday morning.

Vanguard’s Raithatha said the asset manager expects the ECB to reduce interest rates between four and six times this year.

Europe’s central bank is expected to impose its first rate cut in June after holding rates steady earlier this month.