Heading Towards Economic Storms in 2025: Why the Federal Reserve’s Actions Matter
The U.S. economy is at a critical juncture, with potential stormy waters ahead in 2025 if the Federal Reserve does not take action on interest rates soon. According to State Street’s head of investment strategy in EMEA, Altaf Kassam, traditional monetary policy mechanisms have “broken,” leading to delays in the impact of any changes made by the Fed trickling down into the real economy.
What has caused this shift in traditional transmission policy mechanisms? One key factor is the behavior of U.S. consumers and companies during the Covid-19 low-interest rate era. Consumers have largely secured their mortgages on longer-term fixed-rate bases, while U.S. companies have refinanced their debts at lower rates. As a result, any effects of sustained higher interest rates may not be felt until a later date when these debts come up for refinancing.
Kassam warns that if interest rates remain at their current levels until 2025 when a significant amount of refinancing is due, we could start to see “more things break.” However, for now, consumers and companies are not feeling the immediate impact of higher interest rates.
While there were expectations of near-term Fed rate cuts, recent inflation data and hawkish commentary from policymakers have caused a shift in market expectations. San Francisco Fed President Mary Daly emphasized that there is “no urgency” to cut U.S. interest rates, citing the strength of the economy and labor market, as well as inflation above the Fed’s target of 2%.
As markets adjust their timelines for potential rate cuts, State Street maintains its expectation of a June Fed rate cut. This divergence in expectations highlights the complex landscape that the global economy is currently navigating, with the actions of central banks playing a crucial role in shaping future economic outcomes.
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