If the Federal Reserve does not act promptly on interest rates, the U.S. economy may face challenges in 2025, according to Altaf Kassam, head of investment strategy in EMEA at State Street. Kassam warned that traditional monetary policy mechanisms have broken, making it longer for any changes made by the Fed to impact the real economy. This delay could potentially postpone any major shocks.
Kassam explained that this shift is due to two main factors. Firstly, U.S. consumers and companies took advantage of low-interest rates during the Covid-19 era to secure fixed-rate mortgages and refinance debts, respectively. As a result, the repercussions of sustained higher interest rates may not be felt immediately, but rather later on when refinancing becomes necessary.
For now, consumers and companies are not experiencing the effects of higher interest rates. Expectations of near-term Fed rate cuts have diminished recently due to persistent inflation data and hawkish commentary from policymakers. San Francisco Fed President Mary Daly indicated on Monday that there is no rush to lower U.S. interest rates, with the economy and labor market showing strength and inflation above the Fed’s 2% target.
Previously, markets had anticipated up to three rate cuts this year
