U.S. Economy: Brace for Broken Things if Rates Stay Elevated

U.S. economy will see ‘more things break’ in 2025 if rates stay high, strategist says

The U.S. economy is facing potential turbulence in 2025 if the Federal Reserve delays raising interest rates.

Historically, interest rate changes by the Fed would swiftly impact the economy.

However, changes are now taking longer to filter through due to several factors.

First, U.S. consumers secured fixed-rate mortgages during the low-interest rate period of the COVID-19 pandemic.

Similarly, companies refinanced their debts at lower rates during this time.

As a result, the impact of higher interest rates may be delayed until these loans are due for refinancing around 2025.

Until then, consumers and businesses are shielded from the full effects of higher interest rates.

This has led to expectations of a near-term Fed rate cut, which have recently faded due to persistent inflation and hawkish comments from policymakers.

In contrast, the European Central Bank is still expected to cut rates in June, but Morgan Stanley has lowered its expectations for rate cuts in 2024.

This shift is partly due to concerns about the Fed’s potential delay in raising rates.

State Street, however, still anticipates a June Fed rate cut.

If this delay occurs, it could exacerbate economic problems by 2025 when a large volume of refinancing is scheduled.

Therefore, timely action by the Fed is crucial to prevent potential economic turmoil in the future.