Vanguard Expects Fewer Rate Cuts Due to AI Spending Boom

Vanguard Expects Fewer Rate Cuts Due to AI Spending Boom

Global fund management giant Vanguard anticipates that the Federal Reserve will cut interest rates far less than Wall Street expects, driven by a robust economy fueled by a “massive” spending surge in the artificial intelligence sector. In a recent interview, Sara Devereux, Vanguard’s Head of Fixed Income overseeing $2.8 trillion in assets, stated that she expects only one or two further interest rate cuts after two consecutive 25-basis-point reductions this fall. This forecast sharply contrasts with the prevalent market bets that foresee three to four rate cuts by the end of 2026. “There are too many Fed rate cuts priced into the market right now. The market is overly reliant on that,” Devereux noted, adding, “Maybe we only see one or two more cuts.” Devereux added that the Federal Reserve could reach a “neutral” level for interest rates, a state where borrowing costs neither accelerate nor decelerate economic growth, “by the middle of next year.” This hawkish prediction from one of the world’s largest asset managers comes as the Federal Reserve is intensely debating whether to cut interest rates next month. Policymakers are weighing signs of a weakening labor market against persistent inflation and moderate growth. In recent weeks, investors have already scaled back their expectations for a December rate cut, contributing to a stock market pullback. Vanguard anticipates U.S. economic growth of 1.9% this year, followed by an acceleration to 2.25% in 2026. Devereux said this upward revision is predicated on the belief that spending on AI infrastructure will continue to grow at a striking pace. AI capital expenditure has grown by about 8% this year, a “huge increase,” and the firm currently projects that spending will remain near this level next year. Devereux believes this spending will underpin growth in 2026 and limit the Federal Reserve's scope to ease monetary policy without triggering inflation. “I think the biggest takeaway we got this earnings season was probably about AI capital expenditure. We revised our GDP forecast pretty significantly, and that’s really largely predicated on that,” Devereux said. Devereux's optimism regarding spending on chips, data centers, and other AI infrastructure contrasts with recent investor anxieties, who fear that the surge in tech stocks has become excessive. The tech-heavy Nasdaq Composite Index has fallen about 7% this month, and prices for bonds issued by large technology groups have also declined. Devereux cautioned that corporate bond prices could take a hit in the coming months as the market absorbs large bond issuances from companies like Amazon, Meta, Alphabet, and Oracle. This borrowing spree is expected to continue next year, with JPMorgan estimating corporate bond issuances will reach $1.8 trillion in 2026. “We’re always overweight credit. But we’re less overweight now than the average for the whole cycle. Valuations are tight, and supply is very, very big,” Devereux said. Despite this, Devereux said that the recent bankruptcies of subprime auto loan group Tricolor and auto parts company First Brands, while sparking concerns in both public and private debt markets, are likely isolated incidents and do not represent a broader problem.