On Wednesday, the Federal Reserve announced its monetary policy decision to hold interest rates steady. However, the central bank's dot plot, which outlines projections for future rate movements, pointed toward a potential rate cut in December. To delve deeper into the outlook on Fed rate cuts, Allianz chief economic advisor Mohamed El-Erian joins Catalysts.

El-Erian notes that the Fed is targeting a "soft landing" but acknowledges that "there are two tails" to this scenario, with "risks on both sides." He emphasizes that the Fed must strike a delicate balance between these risks, and the problem lies in the fact that this balance is "in favor" of the Fed pushing rate cuts out.

El-Erian states that a rate cut in December would be "too late." He explains that "by that time, the lagged effects of what was a significant increase in rates would be biting even more." El-Erian also highlights that individuals continue to be strained under high inflation in the aftermath of the pandemic, and the Fed's current timing for rate cuts is heightening that issue.

Watch Yahoo Finance's full interview with Mohamed El-Erian.

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

This post was written by Angel Smith

Catch up on Yahoo Finance's coverage and reporting of the Fed's interest rate decision from Wednesday, and the central bank's policy outlook for 2024:

How to read the Fed's updated dot plot

The Fed isn't really taking 2 rate cuts off the table

Fed 'dot plot' suggests central bank will cut interest rates one time in 2024, down from 3 cuts in March

Fed trying not to get 'stuck' in inflation: Evercore ISI's Guha

Fed 'dot plot' has 'enormous' utility: Fmr. Dallas Fed pres.

Fed's unanimity, 'lack of debate' is 'troubling': Economist

Fed's December rate cut would come 'too late': Mohamed El-Erian

A September rate cut is 'too close' to election: Strategist

Inflation was the day's real market mover, not Fed policy

Video Transcript

But first we have to talk about today is a big story and that is inflation and the fed producer prices see their biggest decline since October.

This coming after consumer prices cool more than economists had expected in the latest report yesterday on Wednesday.

Still the fed remaining cautious only forecasting one rate cut this year.

When asked, asked about the risks of waiting to cut rates.

Here is what FJ Powell had to say.

We understand that if we wait too long, that could come at the cost of economic activity, of employment of the expansion, we understand that if we move too quickly, we could end up undoing a lot of the good that we've done and have to then start over and it could be very disruptive.

So we, we're, we're extremely aware of both, both of those risks joining us.

Now, we want to bring in Mohammed, El Arian.

He is Allan's Chief economic adviser as well as our very own Julie Hyman here joining the conversation as well.

Mohammed.

I it's great to see you.

Thanks so much for taking the time to join us.

I, I wanna start with what we just heard.

That thought that we just played, that we just played here from Fed chair, Jay Powell.

He's saying that the fed is acutely aware of the risk here to both sides saying that the fed once again, reiterating remaining data dependent.

I'm curious though, that downside risk of the fed waiting too long.

What exactly do you think that could look like?

And the odds of that actually happening at this point?

So I think Chad Powell is correct in pointing out that there are two tails to the soft landing.

The soft landing is what he's targeting.

Um, but there are risks on both sides.

I think what he misses is the balance of that risk that the balance unfortunately is in favor of them being too late and the economy is slowing more than it should and small businesses and low income household being hit particularly hard.

You ask, what is that probability?

I put it at 35%.

There's a 35% probability that they may end up too late.

Now, the good news, it's not about 50 but it's a pretty fat tail that the fed should be very, very attentive to, uh, Mohammed.

It's Julie here.

It's great to see you.

So at this point, when is too late, do we have a decent idea of the timing of, of when the fed should begin cutting and when it actually is likely to begin cutting?

So, in my opinion, too late is what is reflected in yesterday's SEP or dot Plot, which is the possibility of one hike.

And let's remember, four people said no hikes.

And if this is the normal fed hiking cycle, that one hike would come in December, so that in my opinion, would be too late.

By that time, the lag effects of what was a significant increase in rates would be biting even more already, the cushions that small businesses have and household poor households have, have already been eroded.

You know, pandemic savings have gone debt levels are high delinquencies are going up.

So I worry that if they carry through on what is in the SEP, that will be too late.

Now, the good news Julie is, I strongly believe that they had the CP I data a couple of days earlier and had they had today's PP data.

We would have gotten a different SEP.