High-Interest Rates Could Cause 'More Things To Break' In US Economy By 2025, Warns Strategist

A strategist from State Street has warned that the U.S. economy could face turbulence in 2025 if the Federal Reserve does not act on interest rates soon.

What Happened: Altaf Kassam, the head of investment strategy in EMEA for State Street, expressed his concerns on Tuesday, stating that traditional monetary policy mechanisms have “broken.” He explained to CNBC’s “Squawk Box Europe” that any changes made by the Fed would take longer to impact the real economy, potentially delaying significant shocks.

Kassam attributed this shift to two factors. Firstly, U.S. consumers, whose largest liability is usually their mortgage, secured these on a long-term, fixed-rate basis during the low-interest rate period of the Covid-19 era. Similarly, U.S. companies largely refinanced their debts at lower rates at the same time.

The effect of sustained higher interest rates may not be felt until further down the line when they come to refinance. “The problem is, if rates stay at this level until say 2025, when a big wall of refinancing is due, then I think we will start to see more things break,” Kassam said.

See Also: Retail Sales Rises More Than Expected In March, Indicate Strong Consumer Spending

Expectations of near-term Fed rate cuts have recently faded due to persistent inflation data and hawkish commentary from policymakers. However, Kassam stated that State Street’s expectations of a June Fed rate cut had not changed.

Why It Matters: The U.S. economy has been a topic of debate among experts. In February, Goldman Sachs CEO David Solomon cautioned against overconfidence in the Federal Reserve's capacity to orchestrate a "soft landing" for the economy amid inflationary pressure and geopolitical risks.

In March, JPMorgan CEO Jamie Dimon acknowledged the strength of the U.S. economy but cautioned that a recession is still a possibility.

In April, analyst Gordon Johnson took aim at Federal Reserve Chairman Jerome Powell, citing the Fed’s inability to rein in the fiscal deficit.

Meanwhile, CNBC’s ‘Mad Money’ host Jim Cramer cautioned investors against expecting immediate rate cuts from the Federal Reserve, highlighting the robustness of the economy.

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Economy illustration via Shutterstock.