U.S. economy will see ‘more things break’ in 2025 if rates stay high, strategist says

The
U.S.
economy
could
be
headed
for
stormy
waters
in
2025
if
the
Federal
Reserve
does
not
take
action
soon
on
interest
rates,
State
Street’s
head
of
investment
strategy
in
EMEA
said
Tuesday.

Altaf
Kassam
told
CNBC
that
classic
monetary
policy
mechanisms
had “broken,”
meaning
that
any
changes
made
by
the
Fed
will
now
take
longer
to
trickle
down
into
the
real
economy
—
potentially
delaying
any
major
shocks.

“The
traditional
transmission
policy
mechanism
has
broken,
or
doesn’t
work
as
well,”
Kassam
told “Squawk
Box
Europe.”

The
research
chief
attributed
that
shift
to
two
things.
Firstly,
U.S.
consumers,
whose
largest
liability
is
typically
their
mortgage,
which
were
mostly
secured
on
a
longer-term,
fixed
rate
basis
during
the
Covid-19
low-interest
rate
era.
Similarly,
U.S.
companies
largely
refinanced
their
debts
at
lower
rates
at
the
same
time.

As
such,
the
impact
of,
for
example,
sustained
higher
interest
rates
may
not
be
felt
until
further
down
the
line
when
they
come
to
refinance.

“The
problem
is,
if
rates
stay
at
this
level
until
say
2025,
when
a
big
wall
of
refinancing
is
due,
then
I
think
we
will
start
to
see
more
things
break,”
Kassam
said.

“For
now,
consumers
and
corporates
aren’t
feeling
the
pinch
of
higher
interest
rates,”
he
added.

Expectations
of
a
near-term
Fed
rate
cuts
have
faded
lately
amid
persistent
inflation
data
and
hawkish
commentary
from
policymakers.

San
Francisco
Fed
President
Mary
Daly
said
Monday
there
was “no
urgency”
to
cut
U.S.
interest
rates,
with
the
economy
and
labor
market
continuing
to
show
signs
of
strength,
and
inflation
still
above
the
Fed’s
target
of
2%.

Until
as
recently
as
last
month,
markets
had
been
anticipating
up
to
three
rate
cuts
this
year,
with
the
first
in
June.
However,
a
string
of
banks
have
since
pushed
back
their
timelines,
with
Bank
of
America
and
Deutsche
Bank
both
saying
last
week
that
they
now
expect
just
one
rate
cut
in
December.

That
marks
a
deviation
from
the
European
Central
Bank,
which
is
still
broadly
expected
to
lower
rates
in
June
after
holding
steady
at
its
meeting
last
week.
However,
Morgan
Stanley
on
Monday
trimmed
its
2024
rate
cut
expectations
for
the
ECB
from
100
basis
points
to
75
basis
points,
which
it
said
was
due
to “the
change
in
the
forecast
of
the
Fed
cutting
cycle.”

Kassam
said
Tuesday
that
State
Street’s
expectations
of
a
June
Fed
rate
cut
had
not
changed.