With January's flat Personal Consumption Expenditures (PCE) print, investors worry about the data's potential impact on the Federal Reserve's rate cut policies. However, Cleveland Fed President Loretta Mester told Yahoo Finance that she still sees three rate cuts this year if the economy keeps "evolving" as expected. Bank of America Securities US Economist Stephen Juneau discusses this outlook on Yahoo Finance Live.

Juneau says he is "leaning more towards" Mester's prediction of three rate cuts in 2024. As "economic momentum" progresses, he believes "disinflation can continue." Juneau also states this could be enough for the Fed to embark on a "very gradual cutting cycle."

Juneau notes areas like used cars, apparel, and home furnishings are already seeing deflation. He thinks goods inflation will "subside" as time passes, without putting major downward pressure on inflation. Instead he believes this will allow for a "handoff" to categories like shelter and rent.

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 Angel Smith

Video Transcript

SEANA SMITH: These investors are keeping a very close eye on any clues to the Fed's path forward after the bank's preferred inflation gauge PCE logged its lowest annual rise since March of 2021.

"Yahoo Finance" spoke to Cleveland Federal Reserve President Loretta Mester on if her baseline was still a three-rate cuts in 2024, where she sees Fed policy going moving forward. And here's what she had to say.

LORETTA MESTER: Right now, that feels about right to me, if the economy evolves as I anticipate it will. But, again, if the economy moves in some unexpected way, we'd want to take that into account.

SEANA SMITH: But how is this interest rate environment impacting investment strategy? And what does it mean for growth this year? We want to bring in Stephen Juneau. He is a Bank of America's US economist.

Stephen, it's great to see you again. So we brought up the clip that we heard or the sound bite that we heard from Fed President Loretta Mester yesterday, saying, that she still expects cuts before the end of the year.

Torsten Slok coming out this morning saying, he actually doesn't expect cuts now in 2024. What is your base case?

LORETTA MESTER: Well, I would say we lean more towards Loretta Mester, the Cleveland Fed President. So we are looking for three cuts this year. We haven't changed. We did recently revise up our growth forecast. But that hasn't really changed the story for the Fed.

I think what you're seeing is that economic momentum is continuing to progress. We expect growth to be 2.1% this year up from 1.2% previously. So pretty meaningful upward rise.

But we think that disinflation can continue. And disinflation can be enough for the Fed to really embark on a very gradual cutting cycle. 75 basis points this year, 325 basis point cuts, that's not a lot. That's not really a significant amount. It's just reducing the level of restriction, given that you've seen so much progress on inflation. Notwithstanding the detour we saw in January.

BRAD SMITH: Where are we? We already seeing deflation. And where will that perhaps and move from the disinflation to the deflationary type of conversation for a lot of consumers who are still seeing some of the core prices that they're tracking, perhaps, hitting the wallet?

STEPHEN JUNEAU: So where we're seeing deflation and outright prices coming down is really on the good side. And that's been a big driver of the rapid disinflation we saw last year. So used car prices have fallen significantly.

Apparel prices are down. Household furnishings are declining. They're still up relative to 2019. We're not going to go back to 2019 prices all of a sudden. That's not really how inflation works. But we have seen outright deflation there.

What we think will happen this year is that over time, we're going to see goods deflation subside. It's going to go to from being a real downward drag on inflation to being just more of a neutral setting.

So it's not really going to put that downward pressure. But then we're going to see a hand off to shelter inflation. Rent and OER should continue to moderate this year. We've seen asking rent inflation measures continue to move lower, continue to normalize towards pre-pandemic levels. That typically leads the CPI, the PCE measures.

So we'll get that hand off. And that will allow for ongoing disinflation this year. So a little bit more progress towards the Fed's 2% target.

We think core PCE inflation will end the year at 2.6% year-over-year now. That's up a tenth, but down about 3/10 from last year.

So moving in the right direction. But it's going to be a little bit more gradual this year. A little bit slower.