During a recent interview with CNBC, Altaf Kassam, head of investment strategy for State Street in EMEA, issued a warning about the potential challenges facing the US economy in 2025. Kassam explained that if the Federal Reserve does not take action soon regarding interest rates, the traditional monetary policy mechanisms may become less effective. This could lead to significant shocks in the future.
Kassam identified two key factors contributing to this shift in monetary policy transmission. Firstly, US consumers and businesses had taken advantage of low-interest rates during the Covid-19 era to secure long-term fixed-rate mortgages and refinance debts at lower rates. As a result, any future interest rate hikes might only be felt when these loans come up for refinancing. Secondly, U.S. economic conditions have been favorable lately due to strong economic indicators and low inflation levels. However, if interest rates remain elevated until 2025 when a large wave of refinancing is due, it could lead to more challenges for consumers and businesses.
Recent comments from Federal Reserve officials suggesting no immediate need for rate cuts have shifted market expectations. Initially anticipating multiple rate cuts, investors are now adjusting their forecasts, with some banks predicting only one rate cut in December. Despite this change in expectations, State Street still expects a Fed rate cut in June based on its current prediction model.
In summary, while economic conditions are currently favorable for consumers and businesses in the US, Altaf Kassam warned that if interest rates remain elevated until 2025 when a large wave of refinancing is due, it could lead to more challenges for both consumers and businesses.