The Federal Reserve's highly anticipated decision on interest rate cuts is set to come Wednesday, leaving investors on the edge of their seats. Manulife Investment Management Chief Investment Officer and Senior Portfolio Manager Nathan Thooft joins Market Domination Overtime to share his outlook on the Fed's impending move.

Thooft highlights that the dot plot, which represents the Fed officials' projections for future rate movements, will be "the important news" to watch. He explains that for the Fed to lower the dot plot expectations of rate cuts, there needs to be an economic environment that suggests "either growth is gonna be a bit higher or inflation is gonna be a bit higher, or both." With those conditions not met, Thooft notes that this "could be a fairly boring meeting."

"They [the Fed] actually have a lot of flexibility to do quite a few cuts before they actually become restrictive. So we actually think the market is underpricing the cutting potential over the next 18 months," Thooft tells Yahoo Finance.

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

This post was written by Angel Smith

Video Transcript

Stocks have managed to make headway amid market uncertainty on the US economy.

The Fed of course, kicking off its two day policy meeting as investor skepticism spreads over the path of rate cuts.

Joining us now is Manu Life Investment Management, Senior portfolio manager, Nathan Tough, Nathan, good to see you on set.

So I listen to all eyes on that fed meeting.

Um you know, and the expectation is Jay Pow keeps borrowing costs where they are.

But as Julie was saying a lot, you know, you're gonna have that focus on rate projections on PS commentary.

What, what are you listening for the dot Plot is the important news I think.

But the reality is if you're gonna make a shift in the dot Plot, you're gonna have to make a shift in some of your assumptions that go in to feed that dot plot, right?

And so in order to lower the number of projections for quarter point cuts this year from, let's say three to maybe 1.5 or two.

And I think it's probably going to be a 1.5.

I think you're gonna have a number of fed members that say one still this year and you're gonna have a number that say two.

And so the average might be 1.5, which is certainly lower than the last fed dot plot.

But in order to get that, you're going to have to have an environment where they're gonna suggest either growth is going to be a bit higher or inflation is going to be a bit higher or both in order to make that assumption.

Because if they change nothing, then you got a question, why did they change the flood dot plot?

If they didn't change their assumptions on growth or inflation?

Well, the market is already there, right.

So is it sort of an acknowledgment of reality?

But I guess they can't really do that without changing something?

You're right.

They have to change something and agree with you.

I think this could be a fairly boring meeting because I, I love, I love a good surprise.

So I do hope something is in the eyes of the beholder.

That is true.

We're always gonna have something to talk about, right?

But the reality is, I do think consensus probably has it fairly right?

For the time being where we're a bit different from consensus is we actually think there's a possibility that you could see more price a quarter point cuts over the course of the next, let's say 18 months.

And the current pricing suggest because we actually think given the fed is roughly 250 basis points below their neutral rate above their neutral rate.

They actually have a lot of flexibility to do quite a few cuts before they actually become restricted.

So we actually think the market is actually under pricing the cutting potential over the course of the next 18 months.

Timing is somewhat irrelevant, but it's really that magnitude over that longer period of time that matters more to us.

And so, so given that kind of backdrop made you look across the stock market right now, what looks attractive, where do you want to be invested?

We are still overweight equity and people are asking why are you over equity when you have a fed policy?

That's arguably restrictive and you have slowing economic data.

And I do believe economic data is slowing on the margin.

The the positive though is I don't think the economic data is disastrous and in many ways counterintuitively because that weaker data will afford the cutting cycle to begin.

Like other major global central banks have already done, that's a positive for equity.

On top of the underlying fundamentals of equity still remain quite favorable.

We are seeing positive earnings revisions, not only in the US, but outside the US, we're seeing quality of earnings still be very good.

So I think it's premature to get too negative on equity risk and therefore we're staying weight over equity, but we're also sticking with the winners with equity and So, I don't think you can be underweight tech yet.

I don't think you can be underweight, the large caps in the US yet.

There will be a time when that makes sense.

I just think it's a little premature at this stage to do so.