Altaf Kassam, the head of investment strategy in EMEA at State Street, warned that the U.S. economy could face trouble in 2025 if the Federal Reserve does not act soon on interest rates. He noted that traditional monetary policy mechanisms have broken down, making any changes made by the Fed take longer to have an impact on the real economy. This delay could potentially lead to major shocks down the line. Kassam attributed this shift to the fact that U.S. consumers and companies had secured their debts at lower rates during the Covid-19 era, meaning that the effects of higher interest rates may only be felt later on. He warned that if rates remain at current levels until 2025 when a significant amount of refinancing is due, more problems may arise.
For now, consumers and companies are not feeling the effects of higher interest rates, with expectations of near-term Fed rate cuts fading due to persistent inflation data and hawkish commentary from policymakers. San Francisco Fed President Mary Daly recently stated that there was no urgency to cut U.S. interest rates, as the economy and labor market continue to show strength, and inflation remains above the Fed’s target of 2%. While markets had previously anticipated up to three rate cuts this year, many banks have since pushed back their timelines, with some now expecting just one rate cut in December. This contrasts with the European Central Bank, which is still expected to lower rates in June, but Morgan Stanley has revised its forecasts for the ECB due to changes in the Fed’s cutting cycle.
State Street’s expectations of a June Fed rate cut have remained unchanged despite these shifts in market sentiment. Kassam emphasized the potential risks of delaying action on interest rates, noting that the longer-term impact of current policies may not be seen until further down the line. He warned that if rates remain low until the time of a significant wave of refinancing in 2025, there could be more severe consequences for the economy. While current low rates may not be causing immediate problems, the potential for future challenges remains a concern for experts like Kassam. Therefore, decisive action from the Federal Reserve may be essential to avoid a more turbulent economic outlook in the coming years.
