The economic outlook for the next10 years will be one of resiliency, with the U.S. in 2014 and 2015facing cyclical risks tilted toward better-than-trend growth forthe first time since the onset of the global financial crisis,Vanguard said Thursday.

In releasing its economic and investment outlook for the nextdecade, Vanguard makes its predictions for seven key areas: theglobal economy, inflation, monetary policy, interest rates, thebond market, the global equity market and asset allocationstrategies.

The fund firm said that as in past outlooks, “we anticipate thatthe modest global recovery will likely endure at a below-averagepace through a period of low interest rates, continuing highunemployment and debt levels and elevated policy uncertainty.”

Last year's “unease” about the “reach for yield” is now joinedby concern about “froth” in certain equity markets, Vanguard notes.“Market volatility is likely as the Federal Reserve undertakes themultistep, multiyear process of unwinding its extraordinarily easymonetary policy,” Vanguard said. “Rather than frame this process asa negative,” Vanguard believes it's “an indication of increasingeconomic strength.”

Vanguard president and CEO BillMcNabb said on a recent conference call that the U.S. isin “unprecedented territory” in terms of what the changes in Fedpolicy and quantitative easing could mean. “When something slightlyunexpected happens, a lot of volatility enters the market, andthere are likely to be disruptions as the end [of QE] works out,”McNabb said. “There are likely to be surprises.”

Indeed, Vanguard says that investors should expect “lesscompensation for taking on additional risk than a few yearsago.”

Read more about Vanguard's predictions for the nextdecade …

1. Globaleconomy. For the first time since the financialcrisis, Vanguard's leading indicators point to a slight pick-up innear-term growth for the United States, parts of Europe, and otherselect developed markets. Continued progress in U.S. consumerdeleveraging, strong corporate balance sheets, firmer global tradeand less fiscal drag point to U.S. growth approaching 3%. Thosepositives, however, need to be considered alongside highunemployment and government debt; ongoing structural reforms inEurope, China, and Japan; and extremely aggressive monetarypolicies whose exit strategies have yet to be tested.

2. Inflation. In the near term, monetarypolicies designed to achieve a desirable level of inflation willcontinue to counteract the deflationary pressures of a high-debtworld still recovering from a deep financial crisis. Key drivers ofU.S. consumer inflation generally point to higher-but-modest coreinflation in the 1.5% to 3% range over the next several years. Inparts of Europe and in Japan, deflation remains a greater risk.

3. Monetary policy. Tapering in theFederal Reserve's QE program has begun, although an actualtightening by the Fed is likely some time off. The federal fundsrate appears likely to remain near 0% through mid-2015. That said,real (inflation-adjusted) short-term interest rates are likely toremain negative through perhaps 2017. Globally, the burdens onmonetary policymakers are high as they contemplate extricating fromQE policies to prevent asset bubbles on one hand and being mindfulof raising short-term rates too aggressively on the other. The exitmay induce market volatility at times, but long-term investorsshould prefer that to no exit at all.

Read more: 4. Interest rates …

4. Interestrates. The bond market continues to expect Treasuryyields to rise, with a bias toward a steeper Treasury yield curveuntil the Federal Reserve raises short-term rates. Vanguard'sestimates of the fair value range for the 10-year Treasury bondhave risen and suggest that the 10-year yield may range from2.5%-3.5% over the next year. Vanguard believes that a morenormalized environment, where rates move toward 5%, may be severalyears away.

5. Bond market. The return outlook forfixed income is muted, although it has improved somewhat given therecent rise in real rates. The expected long-run median return ofthe broad taxable U.S. fixed income market is in the 1.5%–3% range,versus the 0.5%-2% range this time last year. Nevertheless, thediversification benefits offered by fixed income in a balancedportfolio continue to be very important. Vanguard believes that theprospects of losses in bond portfolios should be weighed againstthe magnitude of potential losses in equity portfolios as thelatter have tended to exhibit much larger swings in returns.

6. Global equity market. Vanguard'smedium-term outlook for global equities has become more guarded. Inthe 6%-9% return range, the long-term median nominal return forglobal equity markets is below historical averages, and has shiftedtoward the bottom of this range. In addition, concern over thereach for yield in bonds is now joined by signs of “froth” incertain segments of the global equity market. Vanguard thereforeencourages investors to be cautious about increasing equity risk inthe current environment.

7. Asset allocation strategies. Investorsshould expect less compensation for taking on additional risk thana few years ago. Vanguard's simulations indicate that balancedportfolio returns over the next decade are likely to be belowlong-run historical averages, with those for a 60/40 stock/bondportfolio tending to fall in the 3%-5% range after inflation. Evenso, Vanguard still firmly believes that a balanced and diversifiedlow-cost portfolio can remain a high-value proposition in thedecade ahead.