Many on Wall Street have their focus set on the Federal Reserve, watching for any further clues as to when it will cut interest rates. Some are questioning how many rate cuts there will be, but should the focus be more on when they will start cutting?
Kevin Mahn, Chief Investment Officer at Hennion & Walsh, joins Yahoo Finance to give insight into what could happen if the Fed continues its policy of higher for longer interest rates for longer than most expect them to.
Mahn explains that before the Fed cuts interest rates, they need to see "two consecutive quarters of a slowing economy before they can feel good about actually cutting interest rates." When asked about where to see that slow down, Mahn says: "If you look at the GDP now estimate, the recent from the Atlanta Fed, they're forecasting fourth quarter GDP to slow to 2.4%. Still good growth, but much lower than third quarter 5.3%. Then looking at the Fed's own projections for GDP, 1.4% this year and staying below 2% all the way through the end of 2026. If that is, in fact, true, that is an economic slowdown. How does that economic slowdown actually turn to a period of economic growth? The Fed starts cutting interest rates, providing, of course, that inflation continues to moderate."
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 Nicholas Jacobino
Video Transcript
JOSH LIPTON: We are exactly two weeks away here from the Fed's next meeting. Consensus is that it will hold steady, but the optimism over the first rate cut in March is slipping. Markets now to roughly 57% probability the Fed cuts in March, which is down 10 percentage points from just last week.
And our next guest says one risk for the market is keeping rates too high for too long. Joining us now is Kevin Mahn, Hennion Walsh Chief Investment Officer. Kevin, it's always great to have you on the show. Thank you for joining us.
KEVIN MAHN: My pleasure.
JOSH LIPTON: So help us make sense of it, Kevin. So what are your expectations for the Fed in 2024? When do you think they're going to cut, Kevin, and by how much?
KEVIN MAHN: Sure. We'll start with what the Fed's expectations are. As it stands right now according to their most recently released dot plot chart, three cuts next year of 75 basis points, another 100 basis points in cuts in 2025, and yet another 75 basis points and cuts in 2026.
What I find interesting is that they're forecasting GDP growth to slow to 1.4% next year. They're also forecasting inflation to stay at 2.4%. So if they're going to be cutting interest rates this year when inflation doesn't come back to their magical 2% target, it tells me they're more concerned about this economic slowdown potentially moving into recessionary territory than they are worried about inflation staying above 2%.