Don’t Expect Rates to Go Down Just Yet

After a series of interest rate hikes, the Federal Reserve decided to hold steady on Wednesday. For now, the Fed is keeping the federal funds rate at its current target range of 5% to 5.25%. And while markets expect the Fed to cut interest rates before year-end, a machine-learning model from Vanguard suggests otherwise.

In fact, Vanguard expects that the Fed won’t cut rates until the middle of 2024. Vanguard senior economist Asawari Sathe said the firm expects inflation to “remain above 3% through year-end,” while unemployment hits 4.5%.

“In that scenario, the Fed cutting its policy rate this year is unlikely,” she said.

Sathe noted “It’s nearly three times as likely that the Fed will raise” rates or hold steady “this year than that it will cut rates.”

“Our model’s output underscores our conviction that the Fed’s fight against inflation hasn’t yet reached an inflection point,” she said.

Fed Chairman Jerome Powell indicated that the U.S. central bank may implement at least two more rate hikes this year.

Fixed Income ETFs With Intermediate Duration

With rates unlikely to begin declining, now may be a good time to check out Vanguard’s fixed income ETFs on the middle end of the duration curve. For example, the Vanguard Intermediate-Term Bond ETF (BIV) targets investment-grade bonds with a dollar-weighted average maturity of 5 to 10 years.

The Vanguard Intermediate-Term Corporate Bond ETF (VCIT), meanwhile, invests in high-quality corporate bonds with a dollar-weighted average maturity of 5 to 10 years. And for those looking for Treasuries with a dollar-weighted average maturity of 5 to 10 years, the Vanguard Intermediate-Term Treasury ETF (VGIT) may be worth considering.

All three funds have an expense ratio of just four basis points.

VettaFi’s vice chairman Tom Lydon called Vanguard “the Hoover of the ETF industry” for how it’s vacuumed up investor dollars.

“They are just rock solid,” Lydon said. “They have so many choices. They’re low-cost and always very, very dependable.”

For more news, information, and analysis, visit the Fixed Income Channel.