According to the CME Fedwatch tool, 30% of interest rate traders are pricing in the Fed's first rate cut to come in March 2024. Verdence Capital Advisors Chief Investment Officer Megan Horneman joins Yahoo Finance Live to weigh in on a feasible timeline for a rate cut.

Horneman predicts a rate cut in the second half of next year — possibly even as far out as 2025.

Horneman refers to housing, services, and wage inflation as impacting factors that “are still growing on an annual basis well above what the Fed wants.” Horneman plainly points out her concern about rate optimism and insists “some pain in the economy” will be required for the Fed to reach its inflation rate goal and institute rate cuts.

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

Video Transcript

- The Fed in focus on Wall Street. Nearly 30% of interest rate traders are pricing in the Fed's first rate cut in March. It's according to the CME Fedwatch tool. But Richmond Fed President Tom Barkin saying today he sees inflation being stubborn and he's advocating for a higher for longer stance on rates.

We'll get more insight into the Fed's thoughts tomorrow when we get the minutes from the last meeting. For more on this, we turn to Megan Horneman, Verdence Capital Advisors Chief Investment Officer. So Megan, thank you for joining us. Let's get your take on this. When do you think, Megan, the Fed, the Fed starts cutting.

MEGAN HORNEMAN: I think March is way too optimistic. I think you're looking at a second half of next year early 2025. And I think you said it, the inflation now is going to be much more difficult to get down to that 2% level where they want to be. It was pretty easy when we cleared up the supply chains and moving past the pandemic to get some of that goods type of inflation taken out of the equation, but now you have that sticky inflation. The three areas that we're focusing on is housing, services, and then wage inflation. And all of these three things are still growing on an annual basis well above what the Fed wants.

- And so, then what, Megan? I mean, because the market believes that the Fed is done. And the Fed has done nothing to dissuade the market from that belief. But if inflation isn't coming down. Is the Fed actually done?

MEGAN HORNERMAN: I actually think the opposite. I don't know why everyone's getting so optimistic on the fact that they can come in and cut rates. They've told us they can't. They've told us they're going to remain vigilant higher for longer. They haven't done anything to really take a hawkish view out of this. So I think we're back to the same situation we were last year at this time. If you remember, rate cuts were expected in the very early part of this year at this time last year. Didn't materialize.

And it's proven that inflation has just been more difficult to get under control. I think we're in the right trajectory for inflation. But I think getting down to that 2% level is going to take more time. And unfortunately, it's going to take some pain in the economy for us to get there.