Fed could hike interest rates two more times: Vanguard CIO Greg Davis

Vanguard’s Greg Davis believes the Federal Reserve is not done hiking interest rates.

According to the firm’s chief investment officer, the central bank’s next move higher could happen before year’s end.

“Our expectation is the Fed still has more activity to take place, potentially one to two more rate hikes before they finish,” he told CNBC’s “ETF Edge” recently. “If the Fed is ultimately trying to hit their 2% [inflation] target, we believe they will likely need to hike rates again sometime in the course of the next couple meetings.”

Davis, whose firm is the world’s second-largest asset manager, suggests that is good news for investors.

“Interest rates are a lot higher. People [are] actually earning a real return — a real income on their fixed-income investments,” said Davis. “It’s a very different market environment than what we’ve seen in the last 10 to 15 years or so.”

The benchmark 10-Year Treasury yield is just under 5% so far this week. This month, it hit the highest level since the 2007-2008 financial crisis.

“Even before the global financial crisis, the neutral rate of Fed funds was actually higher than what we’ve seen recently as well,” Davis said. “It is higher than what the market’s pricing in — which allows us to believe that Fed funds will be somewhere in that 3.5% type level longer term which … is elevated relative to the marketplace.”

Bond investor shift

His colleague, Vanguard global head of exchange-traded funds, Janel Jackson, sees a shift happening among bond investors. They’re taking on more duration than in the beginning of the year, she said.

“We’ve seen investors move really along the quality spectrum and to the shortest-dated securities away from credit into Treasurys. But, with this feeling of higher for longer, we’re also seeing investors move to the longest end of the curve,” said Jackson. “We’re actually starting now to see more investors move out to the end of the curve in 20-year-plus Treasurys to try and get more of that total return.”

She’s also seeing investors think more about asset allocation.

“Of the 400 products that have been launched this year in the ETF space, 73% of those have been active solutions and a decent amount of those are starting up in the fixed income space as well.” Jackson added.

As of Sept. 30, Vanguard reported it has $7.8 trillion in global assets under management and it has more than 80 ETF investment products.

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