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Vanguard, the world’s second-largest asset manager, expects the U.S. Federal Reserve to maintain a hawkish stance by either keeping interest rates elevated for longer than what the market is pricing or by tightening monetary conditions even further.

Global Head of Fixed Income Group Sara Devereux said on Thursday the probability of another interest rate increase by the Fed this year stood at 50%. Beyond that, the U.S. central bank was likely to maintain a “hawkish hold” on rates.

“The economy has shown more resilience than we expected, despite the bank stresses, despite the debt ceiling volatility,” she said in a webinar. “We don’t think they’re going to cut rates any time soon … the Fed may have more work to do.”

Fed funds futures traders on Thursday were pricing for rate cuts in the first half of 2024 after the Fed raised interest rates by 25 basis points on Wednesday and left open the possibility of further hikes this year depending on incoming data on the labour market and inflation.

Fed Chair Jerome Powell said the central bank’s staff expected a noticeable slowdown in economic growth later this year but no longer forecast a recession in 2023, as inflation could come down to target without high levels of job losses.

Vanguard, which manages $8 trillion in assets, said its base case scenario remained for a shallow recession in 2024 as higher interest rates hit the economy. Devereux said there were risks to the upside, with the economy showing even more resilience than expected, which could lead the Fed to resume hiking rates.

Higher rates, on the other hand, could exacerbate the anticipated economic slowdown, and even threaten financial stability, she said. “The downside risk … is the Fed overshoots and they drive us into a deeper recession.”

Devereux said she had an “up-in-quality tilt” for bonds expected to rally in case of a recession such as Treasuries, municipal bonds and agency mortgage-backed securities.

“Then when we go down into corporate credit we’re going to recommend a more selective approach … you want to make sure you’re picking the right names to weather the storm,” she said.

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