Coming out of their January FOMC meeting, Federal Reserve officials have decided to hold interest rates steady where they are, forgoing rate cuts widely anticipated by investors and markets.

Robert Kaplan, former CEO and President of the Federal Reserve Bank of Dallas, weighs in on the Fed's decision and its expected timeline to enact rate cuts in early 2024, likening the governing central bank to an oil tanker that "takes a little bit of time to change direction."

Speaking with Yahoo Finance, Kaplan also comments on select roadblocks obstructing the Fed's 2% inflation rate target as geopolitical headwinds pick up speed.

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 Luke Carberry Mogan.

Video Transcript

- Now, here to continue the conversation around the Fed's path for monetary policy. We have Robert Kaplan, former president and CEO of the Federal Reserve Bank of Dallas. Robert, it is good to see you. Maybe we'll just start here, Robert, your reaction to this statement. Would you make of it?

ROBERT KAPLAN: They want to leave their options open. I think they want to make sure that the market doesn't believe too strongly that they're going to cut in March. And I think they're setting the stage for making a decision in either March or May, that they will do their first cut. But they're giving themselves more time to see a couple of more inflation reports and make sure inflation progress is sustained.

- Robert, I have to ask since we have you here. Do you miss it? How hard is it in that room coming to a consensus, not just on the decision, but kind of the discussion around it? You know, what do you think people maybe don't understand about this whole process?

ROBERT KAPLAN: The Fed is a little bit like a supertanker, meaning you don't-- unless it's crisis, you deliberate, you try to telegraph the way you're thinking about things, and then you act. And so, for the Fed to stop raising rates, that's a little bit like moving a supertanker. To start cutting rates, it wants to be confident. And I would want to be confident that inflation progress that's been hard earned has been sustained. But once it starts cutting, it may wind up cutting more than people think. But changing direction, you think of a supertanker, it takes a little bit of time to change direction.

- And Robert, sticking with inflation here, the Fed wants to obviously, get back to that 2% target, and then importantly, right, stay there. We've had some economists come on the show, Robert, who say, you know that actually might be tougher. Then some are estimating. What do you think?

ROBERT KAPLAN: Listen deglobalization raises costs. The energy transition is expensive. And the big thing I'd point out that isn't being discussed enough-- while monetary policy is very restrictive, fiscal policy is historically stimulative-- the Inflation Reduction Act projects, Infrastructure Act projects, the unspent spent ARPA money, American Rescue Act. And so, the demand around the country from these projects, for goods, services, but particularly, workers, is having, I believe, a real impact on the service sector and why you see services sector inflation somewhat sticky, and it's the reason the economy is this resilient-- it's a mistake to think that this is just an organic miracle that the economy is weathering these rate increases.

I think without these big stimulative fiscal programs, we would have slowed dramatically further. And I don't think the Fed would have raised rates even to 5 and 1/4, or 5 and 1/2. But that complicates the assessment. And it means for me that service sector inflation is liable to remain somewhat sticky.

- And is that, do you believe, what the Fed means when it says it needs greater confidence that we're going to see that sustainable rate below 2%? I mean, what are they looking at there? What are they talking about?

ROBERT KAPLAN: I think if you didn't have the very large fiscal stimulus, I would have a little more confidence that the cooling we're seeing will sustain. I still do. We're clearly cooling. But when you have a multibillion dollar projects being initiated around the country, you ought to be on guard, and I would be on guard, and I am on guard, that you could see some stickiness or re-acceleration. You also have the situation in the Middle East, which is snarling up supply lines and costs there. So that's a little bit, I think, what they're watching. I think the predominant view is that we're seeing progress.

They just want to see after this long fight, they just want to see a couple of more months of continued progress. And on the flip side, I don't think they want to see the real Fed funds rate get much above, say, 1 and 3/4 to 2. Right now, if inflation, let's say, is running 3, and the Fed funds rate is 5 and 1/4, 5 and 1/2, probably, all things being equal, I'd prefer the Fed funds rate to be closer to 4 and 1/2, or 4 or 3/4. And I think that's where they're heading.