Thanks to several interest rate hikes, the Federal Reserve has been able to curb inflation and bring it closer to its 2% goal. However, as economic uncertainty remains, the debate over what the Fed do in the coming months rages on. Claudia Sahm, Sahm Consulting Founder and Lee Munson, Portfolio Wealth Advisors President & CIO join Yahoo Finance to discuss the Fed's performance so far and weigh in on the central bank's policy decisions going forward into 2024.

Sahm argues the Federal Reserve should cut rates sooner than later as deflation has already begun, asking them to "get out of the way and look at the data." Munson adds on to that sentiment, commenting on Fed Chair Jerome Powell stating: "This is not about economic statistics. This is about a very wealthy man named Jay Powell, and he's thinking about what his legacy is and what's going to be on his tombstone."

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

Video Transcript

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BRAD SMITH: In November, we saw inflation come down to 3.1% year over year, but something that's keeping inflation high is rents, that rose 6.9% and still some investors remain optimistic that the Fed might stick the soft landing, but getting inflation down to 2% has proven to be more difficult than expected.

Our next guest both say inflation is going down, and that is the key to the soft landing, but the Fed might be its biggest own enemy. Now, we have Claudia Sahm, who is the Sahm consulting founder, and Lee Munson, who is the Portfolio Wealth Advisors president and CIO here. Great to have you both here with us on this holiday, abbreviated trading week, at least, however, the economy continues to tick on here of course every day.

Claudia, I want to begin with you. When you think about the Fed getting down to that 2% personal or set target that they've put out there, what is the key element, especially within their own data dependency that is actually going to get them there?

CLAUDIA SAHM: The Fed needs to wake up. They have beaten us over the head that they are data-driven and they are, but come on, inflation has come down from a peak of 9% to 3%. That is a massive disinflation. I understand they want to see conviction, but what are you looking at? I mean, this is really moving.

And, you know, so I understand. I understand the psychology of the Fed. There was absolutely a case for them to cut in December. I don't expect them to cut until May. And I'm not-- I don't really think it matters frankly, for the soft landing, but it's time for them to get out of the way and look at the data.

BRIAN SOZZI: Lee, good to see you, my man. Does this all end badly for investors here? This is a market trading at record highs in the expectations that rates are cut several times next year. But maybe they just don't get cut and investors are just handed not good things.

LEE MUNSON: Well, how are we any different from January? Remember January by tech stocks on a Fed cut and then it became-- we kept moving the goalposts. Maybe you have to buy tech stocks because of AI or some other thing. But here's the thing. What's different from where we were in January? Yes, more time has passed.

But look at the employment cost index. I love looking at ECI. Because until you start normalizing, just get back to like the five-year average on the ECI, right? Which it's over 4. The five-year average is 3 and 1/2. It needs to be at 3 or lower. Just that little indicator right there tells us that wage labor is still high. It's going to be a problem. And the Fed is looking at that.

I think we have to understand this is not about economic statistics. This is about a very wealthy man, his name is Jay Powell, and he's thinking about what his legacy is and what's going to be on his tombstone. Now,

BRIAN SOZZI: What does this-- Lee, what is his tombstone say if you had to write it today?

LEE MUNSON: He kept rates high all through 2024, pissed off a lot of investors, and went down as Paul Volcker and not Arthur Burns. Arthur Burns was a fine central banker, but his legacy was tarnished. And I think until we slay inflation, until we see we've got to see PCE at a 2 handle for six months. I just would say a 2.9, a 2.8.

But until we see a 2-point something for a minimum of 3 to 6 months, I don't see why the Fed is going to jump the gun just because it might be more comfortable for us, just because we prefer that, just because that would keep the stock rally going. I don't think the Fed cares.

And I think we're going to see more volatility going into January and February, as people realize and reality sets in. This isn't about the statistics. And we have to see 2 point something for multiple months.