The US labor market has seen an uptick in company layoff announcements, with Macy’s (M), Wayfair (W), and Google (GOOG, GOOGL) recently set to cut jobs. With the labor market cooling, could this signal early March interest rate cuts which the market remains hopeful for?

Bank of America Chief US Economist Michael Gapen joins Yahoo Finance Live to discuss the factors that could lead to the Federal Reserve cutting rates soon.

Gapen notes that the labor market is significantly more impactful now to a Fed decision than in previous months: “The quicker the labor market cools down, the more Fed cuts should be coming."

A soft landing scenario is expected as Gapen insists that “the Fed has a stronger vested interest in achieving that soft landing than at any point during the recovery," and doubts that the Fed is reliant on the unemployment rate needing to reach 5% or above.

In the case that the Fed does not cut rates in March, Gapen believes that a June cycle "would not make much of a difference."

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

Editor's note: This article was written by Eyek Ntekim

Video Transcript

- We want to bring in Michael Gapen. He is Bank of America's Chief US Economist. Michael, it's great to talk to you again. So let's start with the Fed cuts, the timing, and exactly how the labor market, the recent developments that we've seen, how you see that playing into the decision here that we could be getting from the central bank over the coming months. I guess, do you think a March-rate cut is still on the table?

MICHAEL GAPEN: We do. We have four cuts this year. So 100 basis points and cuts in 2024. But the cutting cycle starting in March. And I think you bring up a good point that the labor market is more important in the Fed's thinking than it was, say 12 to 18 months ago when the Fed was willing to endure, in their words, some pain in the labor market in order to help bring inflation down to low and stable levels.

But as we moved across 2023 and into 2024, the Fed is seeing actual data that says, hey, we can grow at a modest rate while still seeing inflation come down. So in December, the Fed admitted their reaction function has changed a bit, meaning the more the labor market softens, the more the Fed will be inclined to move to rate cuts and potentially move faster. So yes, the quicker the labor market cools down, the more Fed cuts should be coming.

- Is it is it more about seeing that unemployment rate tick higher to that above 4% and actually 5% forecast that some economists have put out there, or is it, on the other side, if the Fed is able to still have a strong employment situation but see inflation continue to cool and get to that two handle but 2% target that they've put forward that it's fine if the labor market doesn't deteriorate to the expectation that some economists have put out there?