The number one theme in the global market for 2025: "Higher and Longer" Revisited
The chief economist of Apollo stated that, whether from the Federal Reserve's short-term expectations, long-term expectations, or market expectations, U.S. interest rate expectations are on the rise, and the FOMC expects the federal funds rate to remain at its current level by the end of 2026
As we move into 2025, the global financial markets are facing a key theme: "higher for longer" interest rates.
Recently, Torsten Sløk, Chief Economist at asset management giant Apollo, mentioned in a column that U.S. interest rate expectations are rising from three perspectives:
- Short-term interest rate expectations are rising: Federal Reserve officials continue to raise their expectations for the federal funds rate, anticipating that it will remain at current levels until the end of 2026.
- Long-term interest rate expectations are climbing: The Federal Reserve's expectations for the long-term federal funds rate are also being continuously adjusted upward, reflecting a change in officials' views on long-term economic growth and inflation prospects.
- Market expectations align with the Federal Reserve: Financial market participants are gradually raising their expectations for future interest rate trends, increasingly aligning with the Federal Reserve's views.
The Federal Reserve's goal of maintaining high interest rates for an extended period is to slow consumer spending, capital expenditures, and corporate profits, thereby bringing inflation closer to the Federal Reserve's 2% inflation target.
This has significant implications for asset allocation and investment portfolios next year, as rising risk-free rates require investors to reassess the relative attractiveness of stocks and bonds. Particularly in the current environment where stock market returns are primarily driven by a few technology stocks, a high interest rate environment may put pressure on overall stock market performance