While stocks rejoice about the potential for interest rate cuts in 2024, Federal Reserve officials may have spoiled the celebrations by stating their caution on implementing the first round of rate cuts.

Sahm Consulting Founder Claudia Sahm joins Yahoo Finance Live to discuss the path forward for the Fed and when to expect rate cuts next year.

"There is actually reality on our side for the soft landing. Last year was an intellectual argument that this inflation would unwind, and like it's happened," Sahm, the former Federal Reserve Board Economist after whom the Sahm rule recession indicator is named, says. "There is going to be a bumpy ride... They're only going to get two more inflation reads before the March meeting, those two are not going to both be happy — data is noisy."

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

This post was written by Luke Carberry Mogan.

Video Transcript

JULIE HYMAN: I guess the question is whether, indeed, we're going to get this soft landing that everybody's been talking about, right?

I know, you know, we have the Sahm indicator that you've talked at length about, which is not indicating a recession right now.

What's your optimism level?

CLAUDIA SAHM: My optimism level has been high throughout that this would happen.

In the last week from getting the jobs report where the labor market really looks balanced, people are still coming in, the unemployment rate, kind of, ticked back down.

Labor market looks good, that takes a lot of pressure off the Fed.

They've been worried about the labor market.

That seems to be OK. Then we got the consumer price index, that looks fine.

I mean, inflation has slowed dramatically this year without losing growth, without losing jobs.

And then the producer price index, that was a nice surprise for FOMC morning.

Like, that was another good.

So it's like there's actually reality on our side for the soft landing.

Last year, it was an intellectual argument, like, that this inflation would unwind.

And like, it's happened.

Now, there's going to be a bumpy ride.

I don't expect all the data-- I mean, they're only going to get two more inflation reads before the March meeting.

Those two are not going to both be happy-- I mean, you just-- data is noisy, right?

But it's clear we're getting there and it's based on data.

And it's like, wow, we're really going to do this.

JOSH LIPTON: So Claudia, we're really going to do this.

We're really getting there.

Let me ask you this, when do you think you could see cuts next year, Claudia?

What time frame, first half, back half?

How deep would they be?

And what does that depend on, Claudia?

Does the Fed have to see core PCE come back to 2% and stay there?

CLAUDIA SAHM: Well, they're going to cut before they get to 2% or at least that's their intention.

If they wait too long, they might not.

No, I think they're going to want to see continued progress.

My thinking is whatever you think the Fed should do-- or not even should do, what do you think the Fed would do, likely, put another meeting on it, right?

Like, this is a very tough situation.

They're trying to do the pivot and start cutting.

It's in an election year.

They're just going to be more conservative.

And that's where Powell was so encouraging because it's clear they are not the, like, first cut towards the end of the year thinking, right?

So I think it'll be a little slower.

I don't think it'll matter much.

The US economy is in a really good place.

They can, kind of, buffer the Fed being slow.

And I mean, frankly, market rates are what people pay and they've started to ease up already.

So I think it's good, but we'll play the guessing game with the Fed.

There'll be high drama over something that largely doesn't matter to the economy.

And it's really hard when you have all these officials out, like, saying stuff without any coordination.