Index fund and ETF giant Vanguard expects the Federal Reserve’s easing cycle to be more limited than markets anticipate as inflation remains sticky, and forecasts U.S. GDP growth to slow to 2.1% next year, according to its economic and market outlook for 2025.
The Vanguard research team, led by Global Chief Economist Joseph Davis, predicts core inflation will stay above 2.5% in 2025 despite recent progress, forcing the Fed to keep its policy rate at or above 4% by year-end rather than cutting more aggressively.
For investors, Vanguard’s outlook challenges market expectations of aggressive Fed rate cuts, suggesting a different path ahead as inflation persists and economic growth remains resilient despite two years of restrictive monetary policy.
As the firm adjusts its outlook for the new year, Vanguard sees U.S. growth momentum powered by productivity gains and available labor—not monetary policy. These supply-side factors helped drive robust 3% GDP growth in 2023 while inflation cooled.
“This emphasis on the ‘landing’ may not fully explain the pairing of exceptionally strong growth and falling inflation that we’ve witnessed in the U.S.,” according to the report. “The forces that do explain it suggest a new narrative for the economy and markets.”
Looking ahead, Vanguard cautions that emerging policy risks like stricter immigration rules and trade tariffs could offset those positive supply drivers. The firm projects U.S. GDP growth will moderate to 2.1% in 2025 from around 3% currently.
Meanwhile, other major economies face tougher conditions after missing out on America’s supply-side fortune. The Euro area is expected to grow just 0.5% as it grapples with weak productivity and fading external demand. China’s growth forecast is at 4.5% amid property sector troubles and subdued confidence.
For markets, Vanguard sees growing tensions between momentum and stretched valuations, particularly in U.S. equity ETFs. While near-term returns could stay strong if earnings growth persists, high starting valuations will likely drag on long-term performance.
The ETF issuer remains constructive on bonds, projecting 4.3% to 5.3% annualized returns for both U.S. and global ex-U.S. bonds over the next decade. Higher starting yields provide an attractive “coupon wall” that helps cushion against modest rate increases.
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