Investors cheered the Federal Reserve's dovish tone as Fed officials hinted at three rate cuts in 2024. Policymakers now see the fed funds rate peaking at 4.6% in 2024, down from their previous projection of 5.1%.

EY Chief Economist Greg Daco called the Fed's pivot on Wednesday 'very important.'

"This acknowledgment that inflation has been falling faster than initially anticipated is a very good development... the first step is behind us," Daco told Yahoo Finance. "Now the Fed will have to calibrate how rapidly and to what extent it cuts rates."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

This post was written by Luke Carberry Mogan.

Video Transcript

SEANA SMITH: It's great to have you here in studio. So I think investors are asking themselves this morning whether or not we're in the clear, if a soft landing is a sure bet at this point. What do you think?

GREG DACO: Well, I think for 2023, that was the key question-- are we going to be able to achieve that soft landing? I think we largely have achieved it for 2023. We've seen an environment where inflation has come down within reach of the Fed's 2% target, and we have not seen the recessionary signals that were once feared at the start of the year.

The question for next year is whether that soft landing can be sustained. And I think some of the easing signs from the Fed in terms of its pivot are encouraging in that sense. But we have to be careful. Cost fatigue and the labor market developments will still be the key drivers of economic activity as we navigate next year.

BRAD SMITH: I mean, we were talking with CEOs and one analyst yesterday of the retail sector just about where the state of the consumer is. Does it feel like as the consumer is becoming even more cost conscious, that we are already seeing some of that-- or value conscious, I should say, in their words, are we already seeing cost fatigue start to show up?

GREG DACO: We're absolutely seeing cost fatigue. I mean, that's the big disconnect between how the economy is doing and how people are feeling. Consumer sentiment, business sentiment is quite depressed in this environment, and yet the economy is still moving at a decent pace. It is slowing, but it is still moving forward.

I think that cost fatigue whereby the cost of everything is much higher than it was pre-pandemic is affecting how people feel and how they feel they're able to spend going forward. We're still seeing as we saw in the retail sales data, that people are still spending more dollars. They're being a bit more cautious as to how many goods, how many services they purchase.

I think that's going to be the key story as we go into 2024. And the key backdrop, the key anchor to a soft landing is a labor market that does not retrench. So far we haven't seen the type of retrenchment that precedes a recession. Is that going to last?

SEANA SMITH: So Greg, with all of that, then I guess what is your projection, or what is your outlook or expectation right now for the Fed to cut rates because the Fed here signaling that maybe three cuts are on the table for next year and markets still even a bit more optimistic than that. What do you think is realistic?

GREG DACO: Well, I think the Fed's candid pivot towards the fact that it will be adjusting monetary policy was very important. Now, that's behind us. This acknowledgment that inflation has been falling faster than initially anticipated is a very good development. Now, the Fed will have to calibrate how rapidly and how much it cuts rates, but that first step is behind us, which is a good thing.

It's a realignment with the reality of today's economy. An economy that is gradually slowing where there is a rebalancing taking place between labor supply and labor demand, and where inflation is falling back to a level that would be less of a concern for the average day business leader and consumer.

BRAD SMITH: With the number of cuts we've seen at the end of this year, is that a concern at all for you when you think about the broader labor market picture right now?

GREG DACO: I think we have to be a little bit careful with the market pricing of rate cuts. The Fed is not going to be in a hurry to cut rates very rapidly, unless there is a recession. And as I mentioned earlier, it's important to remember that labor market dynamics and cost fatigue are still going to be the key drivers of economic activity.

There was a lot of rate insensitivity on the way up when the Fed was tightening-- that's why we're not in a recession. We have to be conscious that on the way down when the Fed is easing, there will also be less sensitivity to that easing, and so the euphoria about this soft landing and this environment where we're not going to see any slowdown, perhaps is overdone. The Fed is not going to be slashing rates very rapidly.