Jefferies takes a contrarian stance to economists polled by the Financial Times projecting that the Federal Reserve will initiate interest rate cuts as early as March 2024, continuing through subsequent meetings until rates fall to 2.75 to 3%. Jefferies Senior US Economist Thomas Simons joins Yahoo Finance Live to discuss the note in detail.

Simons notes two key factors influencing this outlook: concerns over decelerating inflation and a notably pessimistic view of economic growth. Simons states the end of first-quarter 2024 “makes sense" to implement a "maintenance cut."

Simons insists that “the consumer is significantly overextended in how much they’re spending," noting a downside for businesses that have maintained high employment. "Once of of those legs starts to wobble, that's the beginning of the end for this labor market cycle," Simons explains.

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

Video Transcript

AKIKO FUJITA: Jefferies one of those, certainly doesn't seem to agree with the economists polled by the Financial Times, who see rate cuts starting late in the year and being very limited. Economists at the firm say in a note that they expect the Fed to make its first cut in March and continue cutting at the four subsequent meetings until the benchmark rate hits 2.75 to 3%. Here to break down the reasoning behind all of that, let's bring in Thomas Simons, Jefferies senior US economist. Thomas, just walk me through that case then. The trajectory that you're seeing, what justifies that given what the economic data points to currently?

THOMAS SIMONS: Hi. Yeah. Good morning and thank you for having me. There are basically two sort of vectors at work with trying to figure out the-- the policy outlook, right? There's one that was just recently brought up by Fed Governor Waller last week that I think got quite a bit of attention, which is this notion that as long as inflation is decelerating, maintaining a certain high level of the funds rate, say 5.5% where it is now, puts increasing pressure on the economy through an increasing real Fed funds rate. Right?

So if we're seeing some signs that inflation is slowing, which I agree with, and we are thinking about how much longer we can maintain this gap, it would seem that the beginning of next year, right at the end of Q1 in March, makes sense to me for when they might be motivated to try to make a sort of a maintenance cut to try to make sure that they don't put undue pressure on the economy.

Now, also in our outlook is a pretty more significantly negative view on growth than most of our competitors. My view has been generally that the-- the consumer is significantly overextended in how much they're spending. The savings rate hovering just around 3%. And I think that businesses so far have been happy to maintain relatively high employment because of that spending. But once one of those legs starts to wobble, I think that that's-- that's the beginning of the end for this labor market cycle.

So if the Fed is looking at some lagged data, they'll be thinking that they're still on this glide path towards the-- or the Golden path or whatever they've been talking about, at the end of Q1. But I think by the time we get into May and those subsequent meetings that you referenced, by then they'll be chasing a labor market that's weakening more rapidly.