The Bureau of Economic Analysis released its January Personal Consumption Expenditures (PCE) Index reading on Thursday morning, falling in line with Wall Street expectations. As a result, US stocks (^GSPC, ^DJI, ^IXIC) have opened higher in morning trading. Many eyes are on the Federal Reserve, speculating how it will form its next policy decision.

NatWest Markets Securities CEO Michelle Girard joins Yahoo Finance to discuss the PCE reading and the Fed's decision-making as inflation moves toward a 2% target.

Girard elaborates on what to expect from the Fed's Thursday commentary: "Since the start of the year when the market was initially very optimistic about aggressive rate cuts, we've seen the Fed pushing back. And with the data coming, as you said, on the inflation front more bumpy than the Fed would like to see, that message has been consistent from the Fed –– that yes, the peak in rates may be in, but the timing of when they can cut is something that they want to be patient about, given the fact that they want to have confidence inflation is, in fact, going to get down to 2%. "

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

BRAD SMITH: Just first and foremost here, I mean, we're going to get a lot of Fed speak as we move on throughout the rest of today's trading session as well. How do you think a print like this shifts what we may hear in some of those planned remarks?

MICHELLE GIRARD: Well, I think what we'll probably continue to hear from Fed officials is that they want to be patient. They want to have more confidence that inflation is sustainably moving toward that 2% target before they cut interest rates. Since the start of the year when the market was initially very optimistic about aggressive rate cuts, we've seen the Fed kind of pushing back.

And with the data coming in, as you said, on the inflation front more bumpy than the Fed would like to see, that message has been consistent from the Fed that yes, the peak in rates may be in. But the timing of when they can cut is something that they want to be patient about, given the fact they want to have confidence inflation is in fact going to get down to 2%.

SEANA SMITH: Michelle, do you think that patient approach, does that make sense? Then at this point, it sounds like that maybe is the case. And then when we talk about getting eventually back to that 2% target, what do you think that is going to potentially look like?

MICHELLE GIRARD: So I do think it's certainly the Fed being cautious and wanting to have confidence that inflation is moving lower. And I think it's also tied to some confidence that the economy is going to remain at a slower pace, and particularly that the labor market and some of the wage inflation that is keeping inflation elevated will moderate.

So I understand the need for patience. But also, we have to remember that policy is pretty restrictive. The Fed did-- they raised interest rates very aggressively over 500 basis points. We're looking at a fund's rate at 5.5%. We're not talking about the Fed cutting rates to gas the economy.

We're really talking about the Fed cutting interest rates to take their foot off the brake, if you will. And so I think that to some extent, while it's good to be patient, it isn't as if-- there's a lot of room in terms of just taking your foot off the brake that the Fed could start to do well before you actually hit the 2% target, which we think is a 2025 story.

BRAD SMITH: Of course, some of the thought that's permeated is, why isn't a two handle enough? What is the trend that the Fed is looking for here from your purview?

MICHELLE GIRARD: Yeah. I think that's exactly the point is, the Fed doesn't want to wait till they hit their target at 2% to start lowering interest rates and getting policy back to a neutral stance because policy takes a long time to work. So the Fed should be moving in anticipation of hitting that 2% target. And this is why I'm saying it's good to be patient, but there is a balance here to be struck.

And so arguably, just having that two handle, if you will, dropping below 3% I think has put the Fed in a position where they're rightfully thinking about when the Fed should be cutting interest rates. And this is the balance that they had. They just want to be confident that inflation isn't going to reaccelerate that by the Fed taking their foot off the gas-- sorry-- off the brake, it won't actually lead to a reacceleration in activity in the economy in reacceleration in inflation and the Fed having to reverse course.

So this gets back to them being patient enough to ensure they're firmly enough on that downward target that the conditions around it in terms of the economy are conducive for inflation continuing to move lower even as they take their foot off the brake.

SEANA SMITH: Michelle, let's talk about what all this means then potentially here for the labor market. We'll get that reading next week. But jobless claims here this morning coming in a bit higher than what the Street was expecting, 215,000 new claims for the most recent week. Are you expecting to see much of a deterioration in the jobs market? Or how do you see that playing out as the Fed keeps rates higher for longer?

MICHELLE GIRARD: Yeah. As the Fed is holding rates higher for an extended period of time, we are concerned about the economic impact. And we do think we'll see a downturn in the economy later this year, although full disclosure, we would have thought with the level of interest rates that we're at now, we would be seeing more of a slowdown in economic activity already. And that really hasn't materialized.

We are seeing some loosening in the labor market. It's not as hot as it was. But it's still pretty resilient. And I think this is one of the things that Fed themselves are very watchful of. As I mentioned, I mean, the labor market is still sort of tight enough that wage you know wages are firm running close to 4%. And I think that they-- I do think we will continue to see the labor market loosen up.

We will see some of those wage pressures ease. And as I said, we think the unemployment rate, particularly as we get in the second and half of this year, will rise. All of this certainly giving the Fed the justification that they need and the confidence they need about inflation to actually lower interest rates.