Asset management giant Vanguard: The market has overestimated the pricing of Fed rate cuts.

Global asset management giant Vanguard believes that the "large-scale" spending boom on artificial intelligence infrastructure will drive strong growth in the U.S. economy, and that the Federal Reserve’s rate cuts will be far fewer than Wall Street expects. In a recent interview with the Financial Times, Sara Devereux, the company’s head of fixed income, predicted that after two 25-basis-point rate cuts this fall, the Fed will only cut rates one to two more times. This hawkish forecast contrasts sharply with market bets. Investors currently expect the Fed to cut rates three to four times by the end of 2026, while Devereux, who manages $2.8 trillion in assets, said “the market is overpricing Fed rate cuts.” She expects rates to reach neutral levels “by mid-next year.” Devereux pointed out that AI capital expenditure has grown about 8% this year, and this “sharp increase” will support economic growth into 2026, thereby limiting the Fed’s room to ease policy without causing inflation. Meanwhile, she warned that the corporate bond market is facing the pressure of oversupply, but views recent defaults as isolated incidents. ## AI Spending Boom Reshapes Growth Expectations Vanguard has sharply raised its U.S. GDP forecast based on sustained growth in AI infrastructure spending. Devereux said the firm expects U.S. economic growth to be 1.9% this year, accelerating to 2.25% by 2026. “I think the biggest takeaway from this earnings season may be AI capital expenditure,” Devereux said. “We sharply raised our GDP forecast, mainly based on this factor.” The firm expects AI capital spending to remain near current high levels next year. This optimism about AI spending contrasts with recent investor concerns about technology stocks’ rally being overdone. This month, the tech-heavy Nasdaq Composite Index fell about 7%, and bonds issued by major tech companies also declined. ## Corporate Bond Market Faces Oversupply Challenge Devereux warned that corporate bond prices could be hit in the coming months as the market needs to absorb massive bond issuances from companies including Amazon, Meta, Alphabet, and Oracle. According to JP Morgan estimates, corporate bond issuance is expected to reach $1.8 trillion by 2026. “We have been overweight credit bonds, but the degree of overweight is below the cycle average,” Devereux said. “Valuations are tight, and supply is very, very large.” Despite supply pressures, Devereux believes that recent failures of subprime auto lender Tricolor and auto parts company First Brands are likely isolated incidents and do not reflect broader market distress. She said, “We will see some defaults in the private credit sector. It’s a year of discipline and precision—not all boats will rise.” Risk Warning and Disclaimer The market has risks; investment requires caution. This article does not constitute personal investment advice, nor does it consider individual users’ special investment objectives, financial situation, or needs. Users should assess whether any opinions, views, or conclusions herein suit their specific circumstances. Investment decisions based on this article are at your own risk.