During a recent interview on CNBC, Altaf Kassam, the head of investment strategy for State Street in EMEA, warned about potential challenges facing the US economy in 2025 if the Federal Reserve does not act soon regarding interest rates. Kassam expressed concerns that traditional monetary policy mechanisms have become less effective, meaning that any changes made by the Fed will take longer to impact the real economy. This delay 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 have 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, Kassam noted that despite concerns about rising interest rates, current economic conditions have not yet caused significant financial stress for consumers and companies. However, he emphasized that if rates remained elevated until 2025 when a large wave of refinancing was due, it could lead to more challenges.
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. While the European Central Bank is still expected to lower rates, adjustments to Fed rate cut expectations have also influenced these forecasts. Despite these changes, State Street does not anticipate any alterations to its prediction of a Fed rate cut in June.
In conclusion, while low-interest rates have provided some relief during the Covid-19 era, they may not be enough to sustain long-term growth without action from central banks like the Federal Reserve. As such, it is crucial for policymakers to consider taking action soon before significant shocks occur in the future.