PIMCO Managing Director and Economist Tiffany Wilding joins Yahoo Finance Live to discuss declining optimism around the Federal Reserve's interest rate cut plans, which may be coming later in 2024 rather than sooner.

Wilding says the Fed is weighing risks that inflation remains unchecked against "very strong" economic data. She describes it as a "too good to be true" scenario, noting the Fed likely "wants to be sure" before making major rate cut decisions.

Wilding expects a "mid-year, maybe June" timeframe for initial cuts. However, she says historically cutting cycles with a late start could still lead to faster subsequent cuts than expected.

Wilding notes recent labor market strength provides "support of inflation," so the Fed likely "wants to be careful." In her view, some demand and job market "weakening" is needed for sustainable disinflation to normalize back to the Fed's 2% target.

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Editor's note: This article was written by Angel Smith

Video Transcript

BRAD SMITH: Optimism for seeing a Fed rate cut in March is dropping significantly, down around 15% from 46% last week according to the CME FedWatch Tool. This comes after the strong jobs report and Federal Reserve Chair Powell's comments.

Let's bring in Tiffany Wilding, who is the PIMCO Managing Director and Economist, to discuss what we could see from the Federal Reserve ahead of March. Tiffany, just walk us through your timing, your thesis as to what this next few months, especially as we continue to think about the upcoming meeting schedule, what they could signal about the pace of some of their cuts.

TIFFANY WILDING: Yeah. Well, all of those are really good questions. And I think just taking a step back, you know, really what the Fed is trying to balance right now obviously is the risk that maybe the job isn't done, inflation settles somewhere above target with the risk that they're going to do too much and sort of needlessly weaken the economy.

And the data, quite frankly, you know, hasn't really been that useful. Well, obviously the data is useful. But there's been some question that's arisen from the data because on the one hand, we have very strong growth. And what we would argue is still tight labor market, although it's eased, versus last year, while on the other hand, inflation has come down.

You know, so obviously, this has been almost a too good to be true kind of experience. And I think the Fed just wants to be sure that inflation is coming down in a sustainable way. So what does all that mean?

Well, we had been arguing that March was probably a little bit too early. Chair Powell confirmed that at the most recent FOMC meeting. We think FOMC officials themselves are looking more like a midyear, maybe a June time frame for the first cut.

But then after that, you know, their own forecast suggest that every other meeting pace could be likely. But when we look historically, what we've found is that in rate-cutting cycles that were not coinciding with recession, you know, something like in every other-- or excuse me, in every meeting pace is maybe more likely. So maybe they get going a little later. But they start to go-- when they do go, they go a little faster than their current projections.

SEANA SMITH: Tiffany, what does all this mean then for the jobs market? Because just looking back at Friday's number, obviously much hotter than what the Street had been anticipating, what many economic forecasters have been expecting to see on that print. Will we be able to or will the Fed be able to orchestrate and pull off this soft landing without causing too much harm to the labor market?

TIFFANY WILDING: Well, you know, so I think that is really the key question. And obviously, the Federal Reserve officials believe that they can. And one of the things that we would just note here is that for the unemployment rate to stay consistent, to stay constant, the number-- kind of the neutral level of jobs that the economy can create is about $100K per month.

Now, we've been creating much more than that, $250, $300K in the fourth quarter. You know, it is well above that. So eventually, that kind of job gain should put some downward pressure on the unemployment rate. And that's a hot economy. That should result in support of inflation.

So I think the Fed really wants to be careful here. I do think you need some weakening in the labor market and labor demand. One of the reasons why we haven't seen the unemployment rate increase as a result-- despite the fact that jobs have been strong is because we've had labor supply that's come back.

Some of the folks that maybe took a timeout after the pandemic have come back. And obviously, immigration has been quite strong this year. You know, but ultimately, those factors, they look set to fade. And so we really need some cooling off of the labor market here, in our view, in order to get inflation sustainably back to target.