State Street’s head of investment strategy in EMEA, Altaf Kassam, warned of stormy economic waters for the U.S. in 2025 if the Federal Reserve continues to delay action on interest rates. Kassam explained that traditional monetary policy mechanisms were no longer as effective, meaning that any adjustments made by the Fed would take longer to impact the real economy. This delay could potentially lead to significant shocks in the future.
Kassam attributed this shift to two key factors. Firstly, U.S. consumers had secured their largest liability, mortgages, on longer-term fixed rates during the period of low interest rates caused by the Covid-19 pandemic. Similarly, U.S. companies had refinanced their debts at lower rates. As a result, the effects of sustained higher interest rates may only be felt later when refinancing becomes necessary.
While consumers and corporates were not currently feeling the impact of higher interest rates, Kassam warned that this could change as a wave of refinancing approached in 2025. Despite expectations for near-term Fed rate cuts fading due to inflation data and hawkish comments from policymakers, State Street maintained its forecast of a June rate cut.
Kassam’s concerns contrasted with the European Central Bank’s expected rate reduction in June. However, recent adjustments to forecasted rate cuts by the Fed had caused Morgan Stanley to revise its 2024 ECB rate cut projections. Despite these changes, Kassam emphasized the importance of preemptive Fed action to avoid economic turbulence in the coming years.