Nobody likes changing their mind in public. Money managers do it anyway, because the alternative is being wrong with other people’s money.
Most of the time, those forecast updates are quiet. A firm nudges a number in a quarterly outlook, a few strategists repeat it on TV, and your 401(k) never notices.
This September is different. At the start of the year, some Wall Street banks were penciling in rate cuts for 2026.
Then the Iran war pushed oil above $100 a barrel, inflation refused to cool, and the Federal Reserve raised its benchmark rate on Sept. 16 for the first time since July 2023.
The bond market has done a lot of the Fed’s talking since then. The 10-year Treasury yield, which steers mortgage rates, closed at 5.11% on Sept. 23, its highest close since July 2007, The Hill reported.
That is the backdrop for a forecast change from a name sitting inside millions of retirement accounts.
Vanguard, the fund giant behind many Americans’ index funds and target-date funds, now expects the Fed to raise rates one more time before the end of 2026.
Pakorn Supajitsoontorn / Getty Images
Vanguard raises its year-end interest rate forecast
“We expect one further hike, which would leave the Fed’s year-end target range for the federal funds rate at 4%–4.25%,” wrote the investment strategy group at Vanguard in a Sept. 17 note.
More Fed:
- Scott Bessent sends signal on Kevin Warsh Fed rate hike
- Your cash now pays 4.10% as Kiyosaki says to dump it
- The Fed rate hike is actually good news for millions of Americans
The federal funds rate is what banks charge each other for overnight loans. The Fed set its target at 3.75% to 4% last week, so Vanguard’s call adds another quarter point.
The Fed moved after August data showed inflation risks “remained heightened” at both the consumer and producer levels, the note said.
Vanguard’s own economists frame the move as a one-time correction.
“We anticipate another rate hike by year-end, which we view as a recalibration of policy and the removal of prior accommodation rather than the start of a more sustained tightening cycle at this point,” wrote Josh Hirt, senior U.S. economist, in Vanguard’s U.S. outlook.
In plain English, Vanguard sees one more step up and then a hold.
Related: BofA drops stunning warning about Fed rate hikes
Fed insiders are lining up behind the first half of that view. “In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion,” Fed Governor Michael Barr said in a Sept. 23 speech posted by the Federal Reserve.
Traders moved fast. The odds of an October hike jumped to 71% from 55% a day earlier, according to CME Group (CME) FedWatch data cited by CNN.
How a Fed hike reaches your mortgage and savings
The Fed sets only one short-term rate directly. Almost everything you pay or earn reacts to it, and to what bond traders think the Fed will do next.
Mortgage rates track the 10-year Treasury yield more closely than the Fed’s own rate. Vanguard’s note put the 10-year at 5.01% on Sept. 16, up 83 basis points this year, with the 30-year Treasury at 5.35%.
A basis point is one-hundredth of a percentage point, so that 83-point jump means borrowing got meaningfully pricier in nine months.
Yields kept climbing. “Today has been a perfect storm fueling the surge in bond yields across the curve,” Chip Hughey, managing director for fixed income at Truist Advisory Services, a unit of Truist Financial (TFC), told CNN on Sept. 23.
Home buyers feel it first. The average 30-year fixed mortgage rate rose to 7.12% last week, more than a two-year high, the Mortgage Bankers Association said, according to Reuters.
I ran the numbers on a $400,000, 30-year loan. At 7.12%, principal and interest come to about $2,694 a month, versus about $2,465 at 6.26%, where Freddie Mac’s weekly average sat a year ago.
That gap is roughly $228 a month, or about $2,700 a year, for the same house.
Where your rates stand after the Fed’s first hike since 2023
- Fed target range: 3.75% to 4%, set Sept. 16, according to Vanguard.
- Vanguard’s year-end Fed forecast: 4% to 4.25%, according to Vanguard.
- 10-year Treasury yield: 5.11% close on Sept. 23, according to The Hill.
- 30-year fixed mortgage: 7.12% average last week, according to the Mortgage Bankers Association.
- Savings accounts: 0.64% national average annual percentage yield (APY) as of Sept. 23, according to Bankrate.
Chief economist Joe Davis draws a 5% line for stocks
Here is the part of Vanguard’s messaging that I think most investors will miss.
In a Sept. 18 video, Vanguard global chief economist Joe Davis was asked when rate hikes would start to really hurt markets. His answer set a specific bar.
“You would need to very likely take short-term interest rates materially higher than the 4% or so that the Federal Reserve recently raised toward,” Davis said in the Vanguard video. “Certainly north of 5% would put you in a territory at least before we would start talking about significant sort of downdraft in earnings potential and economic activity.”
He added, “That is not our baseline.”
In my analysis, the key word is “short-term.” Davis is talking about the Fed’s rate, which sits near 4%.
The rates households actually borrow at have already crossed his line. The 10-year yield is above 5%, and the 30-year Treasury yield hit 5.41% on Sept. 23, according to CNN.
So stocks can stay calm under Vanguard’s base case while your borrowing costs stay high.
What higher bond yields mean for your cash
For savers, Vanguard’s message is upbeat. “Higher policy rates have translated into meaningfully higher yields across many fixed income segments, creating a much stronger starting point for future returns,” the Sept. 17 note said.
I checked Vanguard’s own fund pages to see what that looks like in dollars. Vanguard Total Bond Market ETF (BND), an exchange-traded fund, showed a 30-day SEC yield of 4.89% as of Sept. 21, according to Vanguard’s fund page.
That SEC yield is a standardized Securities and Exchange Commission income measure. On $100,000, 4.89% works out to about $4,890 a year.
The same $100,000 in a savings account at the 0.64% national average earns about $640, according to Bankrate. The best high-yield accounts pay around 4%, Bankrate said.
There is a catch. Bond prices fall when yields rise, and BND is down about 1% so far this year on Vanguard’s fund page.
That is why time horizon matters. Money you need within a year is safer in insured savings or a money market fund, while bonds suit cash you can leave alone through a rough patch.
Why October could bring another turn for borrowers
Vanguard’s forecast rests on inflation cooling in 2027. If oil stays near $100 and prices keep running hot, the Fed could keep going.
Davis said it would take “material further aggressive rate hikes” driven by higher inflation to seriously hit financial conditions. That is his risk scenario, and the next Fed meeting on Oct. 27 and 28 will show whether it is getting closer.
Until then, the math favors a simple audit. Check what your cash earns, what your debt costs, and whether your bond money can wait out another hike.
Vanguard is betting on one more increase. Your savings should already be earning like that bet is right.
Related: Vanguard, Fidelity name the smarter alternative to selling stock
