June 24, 2024

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Federal Reserve Chairman Jerome Powell speaks during a news conference at the Fed’s William McChesney Martin Building on March 20, 2024 in Washington, DC.

Chip Somodevilla | Getty Images

The U.S. economy could plunge into a storm in 2025 if the Federal Reserve does not take interest rate action soon, State Street’s head of investment strategy for Europe, the Middle East and Africa said on Tuesday.

Altaf Kassam told CNBC that the classic monetary policy machinery has “broken down,” meaning any changes the Fed makes will now take longer to filter through to the real economy, which could Postpone any major shocks.

Kassam told “Squawk Box Europe”: “Traditional transmission policy mechanisms are broken or don’t work.”

Study leaders attribute the shift to two things. The first is U.S. consumers, whose largest liability is often their mortgages, which in the era of low Covid-19 interest rates are mostly secured on a long-term fixed-rate basis. Likewise, U.S. companies have largely refinanced their debt at lower interest rates at the same time.

Therefore, the impact of continued higher interest rates may not be felt until further refinancings occur.

“The thing is, if rates stay at this level until 2025, when the refinancing wall is about to expire, then I think we’re going to start to see more things break down,” Kassam said.

“Currently, consumers and businesses are not feeling the pressure of rising interest rates,” he added.

JPMorgan's Michael Feroli: Fed still expected to cut interest rates for first time in July

Expectations for a rate cut by the Federal Reserve in the near future have weakened due to persistent inflation data and hawkish comments from policymakers.

San Francisco Fed President Mary Daly said Monday The United States is “in no rush” to cut interest rates, the economy and labor market continue to show signs of strength, and inflation remains above the Federal Reserve’s 2% target.

Until last month, markets were expecting up to three rate cuts this year, the first in June. However, a series of banks have since delayed their timetable for rate cuts, with Bank of America and Deutsche Bank both saying last week that they now expect just one rate cut in December.

It marks a departure from the ECB’s approach, which was widely expected to cut interest rates in June after holding steady at last week’s meeting. However, Morgan Stanley on Monday lowered its forecast for the European Central Bank to cut interest rates in 2024 from 100 basis points to 75 basis points, saying this was due to “changes in the Fed’s interest rate cut cycle forecasts.”

Kassam said on Tuesday that State Street’s forecast for a rate cut by the Fed in June has not changed.

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