The U.S. economy may face challenges in 2025 if the Federal Reserve fails to act promptly on interest rates, according to Altaf Kassam, head of investment strategy in EMEA at State Street. Kassam warned that traditional monetary policy mechanisms have broken, making it longer for any changes made by the Fed to impact the real economy. This delay could potentially postpone any major shocks.
The shift is due to two main factors. Firstly, U.S. consumers and companies took advantage of low-interest rates during the Covid-19 era to secure fixed-rate mortgages and refinance debts, respectively. As a result, the repercussions of sustained higher interest rates may not be felt immediately but rather later on when refinancing becomes necessary.
For now, consumers and companies are not experiencing the effects of higher interest rates as expectations of near-term Fed rate cuts have diminished recently due to persistent inflation data and hawkish commentary from policymakers. San Francisco Fed President Mary Daly indicated on Monday that there is no rush to lower U.S. interest rates, with the economy and labor market showing strength and inflation above the Fed’s 2% target.
Previously, markets had anticipated up to three rate cuts this year but this outlook has shifted as State Street still expects a Fed rate cut in June while European Central Bank is anticipated to lower rates in June after maintaining them last week. However, Morgan Stanley has adjusted its 2024 rate cut expectations for the ECB due to changes in the Fed’s cutting cycle forecast.
Kassam reiterated State Street’s expectations of a June Fed rate cut, emphasizing the importance of timely action to mitigate risks to the U.S
