Economic performance is overheating, and the Federal Reserve may find it difficult to cut interest rates.

The Federal Reserve (Fed) began its historic rate hike cycle in March 2022, and while there was a general expectation that there might be opportunities for rate cuts next year (2025), Torsten Slok, a partner and chief economist at Apollo Global Management, presented an opposing view. He stated on CNBC's 'The Exchange' that economic data is far stronger than expected, and with inflation still above target levels, the Fed not only may maintain interest rates but is also likely to raise them further in 2025.

According to Atlanta Fed data, the U.S. GDP growth rate reached 2.8% in the third quarter of 2024, and it is expected to even reach 3.3% in the fourth quarter, clearly exceeding the Congressional Budget Office (CBO) estimate target of a 'sustainable 2% growth'. Slok pointed out that these figures indicate that the previous rapid interest rate hikes have not fully cooled the economy. 'Inflation is also showing a sticky state.' The annual growth rate of the Consumer Price Index (CPI) in November reported 3.3%, while the Atlanta Fed's 'permanent CPI' and the Cleveland Fed's 'median CPI' range between 3% and 4%, still a distance from the Fed's 2% inflation target.

'The current strong growth and stubborn inflation suggest that monetary policy may not be as tight as previously imagined,' Slok said. He also mentioned that if the Trump administration regains power after the 2024 U.S. elections, its potential tax reform and trade policies could drive economic expansion, further pushing inflation up. 'Measures like lowering domestic corporate tax rates, reducing immigration, and adjusting tariffs could bring additional upward pressure on prices.' Slok believes that if inflation does not quickly recede, the rationale for the Fed to cut rates becomes even less convincing.

Loose financial conditions, rising interest rate risks.

In addition to a strong real economy, Slok also warned that the recent rise in the stock and cryptocurrency markets, along with relatively loose financial conditions, can easily foster optimistic investment sentiment, leading to potential 'overheating' risks. He attributed this to the 'excitement of an election year', but at the same time reminded that a relaxed financial environment may contradict the Fed's goal of 'suppressing demand', further fueling inflation.

In contrast to the market's general expectation of 'interest rate cuts in mid-2025', Slok directly presented the radical view that 'rates may rise again next year'. He stated that current data points towards 'the Fed needing to step on the brakes again', and it is not ruled out that if inflation does not decrease but instead rises, or if significant measures to stimulate consumption are encountered at the policy level, rate hikes will become an unavoidable means.

'The Fed needs to pay more attention to the dynamics of the real world, rather than just following theoretical models for judgment.' With renewed expectations for interest rate hikes, how will the market respond?

Slok's argument is not good news for market investors. Since the end of 2023, the market has implied that interest rates will turn downward in early 2025, supporting the rise in the stock market and some risk assets. However, if inflation does not ease, combined with rising expectations for interest rate hikes, it may suppress market risk appetite, leading the stock, bond, and cryptocurrency markets to face new volatility.

'Even after strong interest rate hikes, the U.S. economy can still grow against the trend to over 3%, indicating that monetary policy may not be as effective in suppressing demand as previously thought.' Slok also emphasized that if the Trump administration reintroduces tax cuts and protectionist measures, potential inflation and capital flows are bound to intensify. 'Investors should be alert to the possibility of further interest rate hikes in 2025,' he reiterated. 'All signs indicate that interest rate trends will still not be overly optimistic next year.'

[Disclaimer] Markets have risks, and investments should be conducted with caution. This article does not constitute investment advice, and users should consider whether any opinions, viewpoints, or conclusions in this article align with their specific circumstances. Responsibility for any investment based on this rests with the individual.

'U.S. inflation pressure has not decreased! Economists: GDP growth exceeds expectations, and there may be another rate hike next year.' This article was first published in 'Crypto City'.