Federal Reserve could hold off on rate cuts as economy outperforms

The February jobs report revealed continuing signs of strength in the economy as inflation seems to cool. Paired with positive GDP results from the fourth quarter of 2023, many on Wall Street, including Deutsche Bank, have raised their GDP forecasts for quarter-over-quarter growth.

Yahoo Finance Markets Reporter Josh Schafer joins the Live show to discuss how economic expectations are shifting from the consensus on both labor and GDP, and what this tendency to outperform could mean for Fed rate cuts.

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

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

Video Transcript

JARED BLIKRE: Last Friday's jobs report continuing signs of strength in a labor market many were expecting to cool in 2024. Now, economists are feeling increasingly better about the outlook for economic growth. And for more, we're bringing in Yahoo Finance's Josh Schafer. So what have you got on deck for us here?

JOSH SCHAFER: Yeah, Jared, so a couple of economists coming out and raising their GDP forecasts after last Friday's jobs report taking in basically now that we have several months of stronger than expected labor data. They think that that's providing perhaps a higher floor to where we could fall in economic growth overall this year. And what you're looking at right now is the overall consensus projections.

We have projected quarter over quarter growth of 0.6% for the first quarter. That's now up to 1.8%. Again, that's quarter over quarter GDP growth for the first quarter.

But a pretty massive move there, guys. And this has been the theme for the overall economic data that we look at this year. It hasn't just been economic growth that's shifted from consensus, it's also been inflation expectations.

When you zoom back two months ago, the broad consensus on Wall Street was inflation is falling faster than we expected. We're going to get a Fed rate cut in March. And we might get six rate cuts this year.

Well, now, we're redoing that forecast as well. Inflation's maybe stickier than we first thought. And we're also redoing the Fed rate forecast, right?

We're now looking at possibly June. Maybe three rate cuts, maybe less. But the key takeaway from that right now is markets have held up.

That's what we saw in the market action today. I know Myles is making this point earlier. But essentially, looking at this and taking away that we're going to get three rate cuts seems to be OK for investors right now.

JULIE HYMAN: For the moment. You know, Jeff Klinghoffer was also talking about the conundrum here, that the economy has defied expectations, that it's puzzling what exactly is going on. And he was talking about some of the signs that the consumer might be slowing down. So I'm curious in your reporting, what are some of the risks that are still being flagged?

JOSH SCHAFER: Yeah, I mean, I would say, honestly, Julie, the biggest risk it seems like people are finding right now would be the overall macro risk that the economy keeps outperforming. So we don't get a Fed rate cut. And then people are still concerned that the lags. The lags are going to come eventually.

JULIE HYMAN: Those long and variable lags.

JOSH SCHAFER: If we keep the restrictive policy there, people are going to keep waiting for the lags, right? And I think that's the main concern is there's no signs of economic growth completely falling off a cliff right now. Yes, there are signs and maybe weakening consumer. But there's not say labor market signs that are flashing yellow or maybe even flashing red at this point.

People's concern would be if this strong economic growth stays, and so the Fed doesn't cut it all this year, what does that eventually do? And also from a stock perspective, what does that do to a lot of these stocks that people sort of have baked in that we're going to get at least a rate cut or two, right? Some of these soft landing trades and the broadening out we're seeing is counting on some level of the Fed cutting at least.

JARED BLIKRE: I got to tell you. I pick on Peloton too much. But if you're Peloton, and you're holding out for that Fed rate cut as the one that's going to get you back to break even from three years ago, that's not going to happen. But, Josh, we got time for a little bit more. What's on your radar for the rest of the week? Anything you're watching particular or writing about?

JOSH SCHAFER: I think it'll be interesting to take a look at PPI's as well, Jared. We know that sort of reiterated what we saw on CPI last month. Do you see that sort of carry through?

And then the other takeaway I have from today that you guys were talking about as well. We were just talking about the potential broadening out or not broadening out. I mean, today we just saw another tech led rally.

What do we see? We have three more trading days left this week. What do we see? Do we see further signs of broadening, or are we going back to complaining that tech is leading the S&P 500 higher and no one wants to buy--

JARED BLIKRE: It is literally tech because people say tech consumer discretionary throw it in communication services. It was literally only tech today.

JOSH SCHAFER: NVIDIA up 7%, Jared. I mean.

JARED BLIKRE: That's all it takes.

JOSH SCHAFER: We can just cover NVIDIA for two hours.

JARED BLIKRE: We pretty much do.

JULIE HYMAN: We have. Josh, I'm sure we will again. Thanks a lot, Josh.