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A return to sound money

Vanguard’s economic and market outlook for 2024

Sound money is the result when interest rates are above the rate of inflation, a development we expect to persist in the years ahead

A return to sound money. It’s a theme we at Vanguard have been communicating for more than a year, and in 2024 we believe that the greater investing world will come around to its implications.

Andrew Patterson,
Vanguard Senior International Economist

Sound money is the result when interest rates are above the rate of inflation, a development we expect to persist in the years ahead. For well-diversified investors, the persistence of higher real interest rates provides a solid foundation for long-term risk-adjusted returns.

In this video, Joe Davis, Vanguard’s global chief economist, puts the return to sound money into the context of our recent and atypical low-rate environment—and explains why the development is so positive.

Vanguard anticipates that the United States and other developed markets will grapple with mild recessions in coming quarters and that central banks will cut interest rates, likely in the second half of 2024, amid growth challenges and inflation falling toward the banks’ targets.

But what happens on the other side of such an economic reset? “We believe that interest rates will remain above the rate of inflation,” said Andrew Patterson, Vanguard senior international economist. “The days of ultra-low interest rates are over, and we have greater conviction in this view than we did just a year ago.”

In the U.S. especially, drivers of this shift include aging populations and relatedly rising fiscal deficits. As government borrowing needs increase and the working-age population of savers shrinks, structural interest rates will naturally rise. Anticipated shortfalls of workers would only add to the challenge.

There’s also a potential positive driver of higher structural interest rates related to productivity, Patterson said. “Advances in artificial intelligence and automation could offset demographic headwinds by increasing productivity, which in turn would increase demand for capital and drive up interest rates.

“We hope the good reasons for higher structural interest rates outweigh the bad ones,” Patterson said. “Either way, we believe that an era of sound money, where savers earn positive real returns and borrowers need to carefully weigh capital costs, is with us for the foreseeable future.”


(Our economic and market outlook for 2024 reflects the house view of Vanguard’s global economics and markets teams as of December 12, 2023.)