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A scenario without rate cuts risks causing a hard landing in 2025, Apollo chief economist Torsten Slok told Bloomberg TV.
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He expects stocks to slowly lose momentum, which could cause huge losses in a higher interest rate environment.
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Slok has cited runaway inflation and the hot economy as reasons why the Fed won’t cut spending.
The strength of the stock markets cannot be sustained if the Federal Reserve leaves interest rates unchanged, Torsten Slok told Bloomberg TV on Tuesday.
If interest rates are not cut this year, the lingering sugar high in the stock market will melt away as the negative effects of aggressive policies continue.
“It is already having a severe impact on highly indebted consumer balance sheets, highly indebted corporate balance sheets and also on banks and regional banks,” Apollo’s chief economist said:
“As the sugar high starts to fade, if the stock market doesn’t continue to rise, you will eventually dominate the security. And that’s probably what we’ll get in 2025, when you finally get the risk of a warmer landing.”
In this environment, Slok warned that the market would be reminiscent of 2022, when stocks fell against rising interest rates.
The stock market ended in a deep bear market that year, and the benchmark S&P index lost 18%.
Despite his warnings about the risks of high interest rates, Slok sees no great chances of a rate cut by the Fed and was one of the first to suggest that monetary policy will remain unchanged this year. Underlying reasons include the surprising strength of the US economy and rising inflation rates across a range of sectors, a point he reiterated in the interview.
His comments come as investors have grown doubtful about the potential for a rate cut in June, once considered the most likely month for rate easing. While markets are now pricing in these opportunities for September, some have gone so far as to suggest possible rate hikes if the Fed looks to rein in inflation. However, Slok does not agree with this view.
“I think from the perspective of the transmission mechanism, they would rather keep rates high for a while, maybe one or two quarters, and then achieve their goal of slowing the economy.”
Read the original article on Business Insider
