Investors patiently await the results of the Federal Reserve's final FOMC meeting on Wednesday which will set the economic tone and the direction of interest rates in 2024.

State Street Senior Global Macro Strategist Marvin Loh joins Yahoo Finance to discuss what he believes is the key to understanding how the Fed membership will vote.

"Ultimately, the market is saying that there are going to be upwards of 4 cuts next year, if the Fed says that there is only 1 cut in the cards, which is effectively holding their September view for the end of 2024 constant.," Loh says. "There is a big gap there, and a lot can happen between now and the end of next year that really would throw a little bit of cold water on kind of this fairly strong risk rally we've seen over the course of the last month."

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

Video Transcript

- We're far away from the Federal Reserve's 2% target. So all eyes are on the Fed's final meeting of the year and the path forward for 2024. Our next guest says the most important outcome this week is how hard the Fed pushes against the increasingly aggressive expectations that I was mentioning for those rate cuts. So let's bring in Marvin Loh, State Street senior global macro strategist.

And Marvin, like I was just mentioning, I'm curious what you think the Fed could possibly do this week to throw cold water on the market inviting themselves to the Fed pivot party here. What do you think they could possibly do on that?

MARVIN LOH: Yeah. Yeah. Yeah. For sure. And I think your graphic that shows the dot plot is the key to them pushing back. Ultimately, the market is saying that they're going to be upwards of four cuts next year. If the Fed says that there's only one cut in the cards, which is effectively holding their September view for the end of 2024 constant, there's a big gap there.

And a lot can happen between now and the end of next year that really would throw a little bit of cold water on this fairly strong risk rally we've seen over the course of the last month, month and a half or so.

- Marvin, can we talk about any rate cuts. And just in general terms here, people can be forgiven for thinking rate cuts, that's a good thing for the market. Stocks should rally on that. But a lot of the time, the fact is the Fed is cutting rates aggressively because it just realizes, oh, we're in a recession and now we have to catch up. And that's kind of the critical deciding factor. How do you see this playing out?

Because we talk about soft landing versus hard landing. And right now, there are enough rate cuts getting priced in. That it's almost getting into hard landing territory, yet stocks are talking a soft landing story.

MARVIN LOH: Yeah, yeah. For sure. Why you have cuts is as important as the rate cuts themselves, for sure. So right now, we're in a Goldilocks scenario. Good data is good, bad data is good because it'll increase rate cuts, if you will. But we're not really looking beyond that. The Fed has in a way made this challenging for investors because its economic projections also show a fairly soft landing environment where GDP still remains at if not slightly above trend growth. The inflation rate slowly ramps down.

And the unemployment rate really doesn't spike. So when you put all those together, there's reasons to be excited. The question that you have to ask yourself as an investor is, how realistic is that given that we still have core CPI, super core at 4%? And if we are higher for longer, to me, that means that there's more problems that can arise. Either in the banking system or in the fact that there are a lot of consumers that are already tapped and we kind of see that in the credit card data.

So I think that there is consumer strength. I think that it's going to take longer before the Fed gets comfortable that that consumer strength is coming down. So in a lot of ways, we're going to see this potential soft landing narrative continue until it doesn't. And then things wind up turning, I think in the second half of the year, when they realize the cuts that they've priced in might not be coming immediately.

And then does the credit situation get worse? Do tap consumers really get more stressed? And then we enter the second half of next year, potentially realizing that bad news is bad.