US Federal Reserve Chairman Jerome Powell holds a press conference following the Federal Open Market Committee's two-day meeting on interest rate policy in Washington, USA on March 20, 2024.
Elizabeth Frantz | Reuters
State Street's head of investment strategy in EMEA said on Tuesday that the US economy could be heading for stormy waters in 2025 if the Federal Reserve doesn't act on interest rates soon.
Altaf Kassam told CNBC that classic monetary policy mechanisms are „broken,” meaning any changes made by the central bank will now take longer to trickle down to the real economy — potentially delaying any major shock.
„The traditional exchange policy mechanism is broken, or doesn't work,” Kassam told „Squawk Box Europe.”
The research leader attributed that change to two things. First, U.S. consumers, largely protected by long-term, fixed-rate terms in the post-Covid-19 low-interest-rate era, are largely responsible for their mortgage loans. Similarly, American companies often refinanced their loans at lower rates during the same period.
So, for example, the impact of sustained high interest rates may not be felt until they come down further when it comes to refinancing.
„The problem is, if rates stay at this level until 2025, when a big wall of refinancing comes up, I think we'll start to see a lot more things break,” Kassam said.
„For now, consumers and corporates are not feeling the pinch of higher interest rates,” he added.
Expectations for a recent rate cut by the central bank have dimmed amid steady inflation data and bearish commentary from policymakers.
San Francisco Fed President Mary Daly said Monday There is no „urgency” to cut U.S. interest rates, the economy and labor market continue to show signs of strength, and inflation remains above the Fed's target of 2%.
Until last month, markets were expecting three rate cuts this year, the first in June. However, many banks have pushed back their deadlines, with Bank of America and Deutsche Bank both saying last week they expect an interest rate cut in December.
That marks a departure from the European Central Bank, which is widely expected to cut rates in June after holding steady at its meeting last week. However, Morgan Stanley on Monday cut its 2024 rate cut expectations for the ECB to 75 basis points from 100 basis points, saying it was due to a „change in the outlook for the Fed's cut cycle.”
Kassam said on Tuesday that State Street's expectations for a June Fed rate cut had not changed.