The Federal Reserve announced on Wednesday afternoon that they will hold rates steady. However, central bank officials are still indicating that three rate cuts are likely to materialize in 2024. Morgan Stanley Investment Management's Chief Investment Officer of Broad Markets Fixed Income Michael Kushma joins Yahoo Finance Live to discuss why he believes the Fed is proceeding with caution.

Kushma stated, "They do not have to adjust monetary policy in any significant way this year" in order to achieve inflation targets. He added that this announcement "steadies the markets," and that the Fed is "on track" when it comes to meeting its objectives.

Kushma characterized officials' projections of an uptick in core inflation as a "realistic" move by the Fed. Kushma argues that the first quarter of 2024 has been "quite disappointing," with inflation data not supporting the Fed's goal of bringing inflation down to its 2% target. However, he notes the Fed has "upgraded their growth forecasts across the board" due to the economy being stronger than expected.

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

JULIE HYMAN: For more on what we heard from the Federal Reserve, already today, three rate cuts forecast for 2024, what this means for investors. Let's get to Michael Cushman, Morgan Stanley Investment Management, CIO, and broad markets fixed income head, good to see you Michael, thanks so much for being here. So first blush reaction here, do you think that the Fed is managing the market's expectations appropriately?

MICHAEL CUSHMAN: I think they're doing a good job of steadying the ship, that there's no change in their long term views about inflation, which has been underperforming or too high in recent months relative to what people thought is more a blip. It's more an outlier because the 2025 forecast, they will be at where they thought they'd be 3 three months ago.

So no change in their long term view that disinflationary process is on track. They do not have to adjust monetary policy in any significant way this year, in order, to achieve those targets. So it's steady as she goes, there's no reason to think that we're not going to achieve our objectives. So in that sense steadies the market, there's no surprises, everything's OK. And sends on track.

JOSH LIPTON: Michael, they did just looking at their projections here for core inflation that did tick up a bit here 2.6%. I'm just interested, when you look across 2024, the trajectory of inflation, what does it look like to you, Michael?

MICHAEL CUSHMAN: Well, I think they were realistic in terms of marking up a bit because the first quarter of this year has been quite disappointing. I think core PCE was up 0.4% January and February. And that is way too high to achieve that low 2 number at the end of the year.

So I think that they've bought into the idea that this is more of a blip but when we return to that disinflationary process, we saw in the fourth quarter of last year. We were ticking along almost below target at 1.6% annualized rate. Now we've accelerated higher, if you look at a meeting a moving average a trend of that, it still looks down.

I did think it was interesting that they took out a rate cut in 2025, that the terminal rate for '25 for Fed funds is a little bit higher than it was before. I think acknowledging the fact that growth is stronger than expected. They've upgraded their growth forecasts across the board and raising the long term equilibrium Fed funds rate is reasonable given the growth of the economy seems to be has more potential than expected.

JULIE HYMAN: So Michael, how do they make the argument that they should be cutting with the inflation projections still at 2.6%?

MICHAEL CUSHMAN: I think it's the trend in the economy. If you look at models that people typically use to think about how the Fed sets interest rates, there are things called Taylor rules. We look at the relationship of unemployment to full employment, the relationship of inflation to target inflation. Those models all suggest that the Fed should be cutting interest rates a bit this year.

Is it three cuts? Is it two cuts? But rates are probably high enough or even too high to achieve that objective over time. In other words, if they didn't cut three times, inflation may be too low down the road. In other words, they have to keep adjusting the Fed funds rate down as inflation continues to drift lower. Otherwise, policy passively tightens over time.

So I think that's what they're saying, policy is more than sufficiently tight now. Models would suggest it can ease at the margins but no big time easing anytime soon. It's more of a glide path, than any aggressive abruptness in terms of cut rate cuts.