The Fed is only going to cut rates once in 2024 as shelter inflation is too high and the job market is hot, Vanguard says

• The Fed will only cut interest rates 25 basis-points this year, Vanguard predicted.
• Central bankers will be held back by high shelter costs and a strong job market, the firm said.

The Federal Reserve is likely to cut interest rates just once this year, as housing costs are too high and the job market is still too hot, Vanguard said.

The asset manager predicted the central bank would lower rates by 25 basis-points in September. That's a lot less than more ambitious rate cut scenarios see for the rest of this year, with investors expecting as many as three rate cuts by December, according to the CME FedWatch tool.

Yet, investors could end up disappointed, Vanguard said, pointing to key issues with the US economy that will make it hard for the central bank to meaningfully loosen monetary policy.

The job market has cooled from the red-hot days of 2021 and 2022, but hiring trends remain strong overall. The US added 206,000 jobs last month, which was more than expected, while wage growth dipped only slightly to 3.9%.

Unemployment, meanwhile, is near historical lows. The jobless rate ticked up to 4.1% in June, but that's still close to the lowest rate since the 1960s.

"The Fed is looking for a reason to cut, but it also can't ignore that cutting too soon – especially with the labor market and wage growth still strong — could risk reigniting inflation," Josh Hirt, a senior economist at Vanguard said in a note earlier this month.

Inflation itself remains above target, which poses another obstacle to central bankers when determining how much to loosen policy this year. Consumer prices grew 3% year-over-year in June, still above the Fed's 2% target.

Meanwhile, core personal consumption expenditures inflation, the Fed's preferred measure of price growth, clocked in at 2.6% in June. That measure is set to rise to 2.9% by the end of the year, Vanguard predicted, though the Fed will likely want to see core PCE inflation drop below 2.5% before considering rate cuts.

Inflation has been driven up, in large part, by rising shelter costs, Hirt said. Shelter costs in the average US city are the highest they've ever been, and were growing at a 5% yearly pace in June, according to Federal Reserve data.

Shelter inflation looks poised to "remain sticky," Vanguard said, predicting that shelter prices would continue to grow around 0.4% month-over-month.

"Should the Fed decide to cut interest rates in 2024, we don't foresee more than a single quarter-point cut. It faces a tricky balance between cutting rates too soon and risking resurgent inflation, and cutting too late to the economy's detriment," the firm said in its investment outlook for the second-half of the year.

Other rate forecasters have trimmed their outlook for Fed easing this year after a series of hot inflation prints dashed rate-cut expectations in early 2024.

Investors are watching for the Fed next policy move when central banekrs convene next week. Markets are pricing in a near-100% chance the Fed will choose to keep rates steady, the CME FedWatch tool shows.