Federal Reserve’s Inaction Could Trigger Economic Shocks in U.S.

The Federal Reserve’s delay in raising interest rates could lead to significant shocks in the U.S. economy, according to Altaf Kassam, the head of investment strategy at State Street EMEA. Kassam warned that traditional monetary policy mechanisms were no longer as effective, meaning any adjustments made by the Fed would take longer to impact the real economy. He attributed this shift to two key factors: firstly, consumers and companies had secured their largest liabilities on longer-term fixed rates during the period of low interest rates caused by the Covid-19 pandemic. Secondly, inflation data and hawkish comments from policymakers had caused expectations for near-term Fed rate cuts to fade.

Kassam maintained that while consumers and corporates were not currently feeling the impact of higher interest rates, a wave of refinancing was approaching in 2025, and this could change everything. Despite recent adjustments to forecasted rate cuts by the Fed causing Morgan Stanley to revise its 2024 ECB rate cut projections, Kassam emphasized the importance of preemptive Fed action to avoid economic turbulence in the coming years.

State Street’s forecast calls for a June rate cut by the Federal Reserve, despite expectations for near-term Fed rate cuts fading due to inflation data and hawkish comments from policymakers. While many experts predict near-term rate cuts by the Federal Reserve, Kassam’s concerns about long-term effects suggest that it may be too late for preemptive action before 2025.