Fed’s Inaction on Interest Rates Could Lead to Economic Disruptions by 2025, Warns State Street Investment Exec

Altaf Kassam, State Street’s head of investment strategy in EMEA, cautioned that the U.S. economy may face challenges in 2025 if the Federal Reserve doesn’t act promptly on interest rates. Speaking on CNBC’s “Squawk Box Europe,” Kassam noted that the traditional monetary policy mechanisms appeared to be inefficient, leading to potential delays in the transmission of any changes made by the Fed to the real economy.

Kassam pointed out that U.S. consumers and companies had taken advantage of lower interest rates during the Covid-19 era to refinance their debts on long-term, fixed-rate bases. This means that the impact of higher interest rates might not be immediately felt but could surface later when refinancing is due. Kassam warned that if rates remained at the current levels until 2025 when a significant level of refinancing was expected, it could lead to disruptions in the economy.

Despite expectations of near-term rate cuts by the Fed, recent inflation data and strong economic indicators have diminished these hopes. San Francisco Fed President Mary Daly emphasized that there was no rush to cut rates, given the robust economy and labor market. This contrasts with earlier expectations of multiple rate cuts this year, with markets now scaling back their projections.

While some banks have adjusted their forecasts based on the Fed’s stance, State Street’s outlook for a June Fed rate cut remains unchanged, despite shifting expectations in the market. This uncertainty underscores the complexity of navigating economic policy amidst changing global dynamics.

In conclusion, while inflation data and strong economic indicators suggest that near-term rate cuts by the Fed may be unlikely, Altaf Kassam warns that delays in interest rate hikes could cause disruptions in US economy by 2025 if Federal Reserve does not act promptly on interest rates.