Altaf Kassam, the head of investment strategy for State Street in EMEA, has issued a warning that the U.S. economy could face significant challenges in 2025 if the Federal Reserve does not act quickly to address interest rates. Kassam expressed concern that traditional monetary policy mechanisms have become less effective, meaning any changes made by the Fed would take longer to impact the real economy. This delay could potentially lead to significant shocks in the future.
Kassam identified two key factors contributing to this shift in monetary policy transmission. Firstly, U.S. 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, the effects of any future interest rate hikes might only be felt when these loans come up for refinancing.
Secondly, recent comments from Federal Reserve officials suggesting no immediate need for rate cuts due to strong economic indicators and inflation levels 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 these concerns about rising interest rates, current economic conditions have not yet caused significant financial stress for consumers and companies. However, Kassam emphasized that if rates remained elevated until 2025 when a large wave of refinancing was due, it could lead to more challenges.
Recent changes in Fed rate cut expectations have also influenced European Central Bank forecasts. Despite these changes, State Street does not anticipate any alterations to its prediction of a Fed rate cut in June.
In summary, Altaf Kassam has warned that rising interest rates could pose significant challenges to the U.S economy by 2025 if the Federal Reserve fails to act soon on monetary policy mechanisms’ effectiveness concerns regarding interest rates’ impact on real economy transmission delays could potentially lead to shocks in future markets’ evolution is expected based on European Central Bank forecasts despite recent adjustments made by some banks predicting only one rate cut instead of multiple cuts as anticipated earlier by investors due to Federal Reserve officials’ comments about no immediate need for rate cuts due to strong economic indicators and inflation levels