US Equities (^GSPC, ^DJI, ^IXIC) have traded lower on Tuesday as investors grow concerned that the first interest cut of the year will come later than hoped. Charles Schwab Chief Investment Strategist Liz Ann Sonders joins Market Domination to discuss why the Fed may not yet have the green light to start cutting rates.

Sonders explains that Fed policy doesn't easily map onto market outcomes: "It depends on the why, in terms of what the Fed is doing. It's not as simple as just if we only knew the policy path on the part of the Fed that we would know what the market is going to do. Interestingly, had the market been right at the beginning of the year of a March start and seven rate cuts, not only did we feel that was the market was getting over its skis, I think that would have been a really poor backdrop for the market. That would suggest suggest that we were probably moving into a recession type condition or financial crisis type conditions."

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Editor's note: This article was written by Nicholas Jacobino

Video Transcript

JULIE HYMAN: Stocks lower as investors concerns grow that the first interest rate cut of the year will come later than hoped. We heard from a few Federal Reserve members today, including Cleveland Fed President Loretta Mester. She said she still expects three interest rate cuts this year.

San Francisco Fed President Mary Daly saying that three cuts is reasonable, but not promised. Our first guest this afternoon thinks the Fed does not yet have a green light to start cutting rates. Let's welcome in Liz Ann Sonders, Charles Schwab Chief Investment Strategist. Liz Ann, always great to see you. Thanks so much for being here.

LIZ ANN SONDERS: My pleasure. Thanks for having me.

JULIE HYMAN: What changed today? Did anything change today? I mean, because here we have kind of what we have been seeing.

In other words, economic data coming in relatively strong. Yields moving higher to some degree. Stocks have been pretty resilient this year. Today, we're seeing them roll over a little bit. What's going on?

LIZ ANN SONDERS: So I think it may be just an elevated focus on the fact that versus the beginning of the year, when the market was way over its skis and expecting the Fed to start cutting in March and up to seven cuts. That came in line with the Fed, or I should say, the dot plot, which is not a policy prescription. And rightly so Powell continues to try to remind investors of that.

But now, the market is actually expecting less than three cuts. So, sort of leapfrogged, the expectations set by the Fed's dot plot. And I think that may be coming into the mix, whisper numbers of Friday being a hotter than expected.

Employment report, which further supports the idea that the Fed should be patient at this point, even though real rates go up as inflation has come down. It's just not having a deleterious impact on the economy. Another reason why the Fed can stay in pause mode for now.

JOSH LIPTON: And Liz Ann, we've had any number of strategists recently come on the show and say, listen, you know what? If we get no cuts this year, the market will be just fine. It's about the economy. It's about earnings. Is that narrative now being challenged here?

LIZ ANN SONDERS: Well, it depends on the why in terms of what the Fed is doing. It's not as simple as just if we only knew the policy path on the part of the Fed that we would know what the market is going to do. You know, interestingly, had the market been right at the beginning of the year of a March start and seven rate cuts?

Not only did we feel that was the market getting over its skis, I think that would have been a really poor backdrop for the market. That would suggest that we were probably moving into recession type conditions or financial crisis type conditions. I think if the Fed is remaining on hold say for the rest of this year, if it's not because inflation has accelerated sharply, but maybe to waffles around like it has been.

But the economy continues to chug along. That's not a bad backdrop. The worst case scenario, of course, would be if growth rolls over, but inflation continues to accelerate, call it stagflation call it reverse Goldilocks. I think that would be something the market would treat poorly.

JULIE HYMAN: It sounds like, Liz Ann, or maybe I'm implying too much. It sounds like the first scenario you outlined is your base case, that you do think it's more likely that we won't see a re-acceleration or at least not a sharp one in inflation, and that the economy will kind of chug along.

LIZ ANN SONDERS: That's certainly the hope. Now, it's been a little bit troubling. The elevation in inflation, the stickiness, if you look at things like the three-month annualized change, the six-month annualized change, be it on PCE, especially at the core level or core CPI, you have seen that move back up. And the Fed is at least expressing hope that their seasonals associated with that.

We'll start to get a better sense of that maybe. Not so much with the PCE report that we just got on Friday because we already had the data associated with that via CPI and PPI, but the upcoming CPI and PPI reports because that's past the point you could have some of these seasonal fluctuations. And I think it would be a risk if that re-acceleration persists.

But base case is that we don't see a significant re-acceleration. And we continue to see decent economic growth.