Altaf Kassam, the head of investment strategy for State Street in EMEA, warned that the U.S. economy could face significant challenges in 2025 if the Federal Reserve does not take action soon regarding interest rates. Kassam expressed concerns that traditional monetary policy mechanisms had become less effective, meaning that any changes made by the Fed would take longer to impact the real economy.
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.
Despite concerns about the potential impact of 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 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
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