According to Altaf Kassam, the head of investment strategy at State Street in EMEA, the US economy in 2025 might face challenges if the Federal Reserve does not act soon on interest rates in the US.
US Economy in 2025
Kassam explained to CNBC that the Fed’s usual methods of influencing the economy are not working as effectively anymore, so any changes they make might take longer to show results. This delay could potentially postpone any big economic shocks.
The research chief explained the two main reasons for this change in the US economy in 2025. Firstly, many US consumers got mortgages with fixed rates during the low-interest COVID-19 period. Secondly, US companies also refinanced their debts at lower rates during this time.
Because of this, the effects of higher interest rates in 2025, like when they need to refinance, might not be felt right away, but further down the road.
Kassam said that if interest rates stay the same until 2025 when many loans need refinancing, they might start seeing more problems. Right now, people and companies are not feeling the effects of higher interest rates but will feel the heat from the possible interest rates in 2025.
Recently, the idea of the Federal Reserve lowering interest rates in 2025 soon has become less likely due to ongoing inflation and policymakers’ strong stance. San Francisco Fed President Mary Daly mentioned on Monday that there’s no rush to lower US interest rates in 2025. She noted that the economy and job market are still strong, with inflation above the Fed’s target of 2%.
Until recently, the US economy in 2025 expected up to three interest rate cuts this year, with the first possibly in June. However, some banks have changed their predictions. Bank of America and Deutsche Bank now think there might be only one Fed rate cut in December.
This is different from the European Central Bank’s plans. They are still likely to lower rates in June after keeping them steady at their recent meeting. However, Morgan Stanley has reduced its expectations for the ECB’s Fed rate cuts in 2024 from 100 basis points to 75 basis points. They say this change is because of the forecast for the Fed rate cuts.
Fed Rate Cuts in 2025
Mary Daly, president of the San Francisco Federal Reserve Bank, stated on Monday that there is “no rush” to lower US interest rates. This decision comes as the possibility of the US economy in 2025 remaining strong, with inflation staying above the Fed’s target of 2%.
The Fed is now anticipated to keep its policy rate stable within the range of 5.25% to 5.5% until around mid-September. It has been over a year since its last rate increase. Following this, the Fed may only make two rate cuts before the end of the year. Despite these expectations, inflation in the first quarter surpassed the predictions of most forecasters.
At the Stanford Institute for Economic Policy Research, she said that the key is not to act urgently when there’s no need for urgency.
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