Later this week, the fourth-quarter GDP and the latest Personal Consumption Expenditures (PCE) prints will be released. These are just some of the data points that the Federal Reserve will use to make its policy decisions, which, as of late, has been a point of contention for many on Wall Street.

Morningstar Chief US Economist Preston Caldwell joins Yahoo Finance to give insight into the Fed's potential next move.

"Now that the Fed has neared its inflation target, it's going to start considering its other goal of assuring maximum employment, which is tantamount to having solid GDP growth," Caldwell explains. "Now, our expectation is... if you look at the Atlanta Fed's GDP now, for example, it's calling for 2.4% real GDP growth in the fourth quarter, and that's the best predictor when we're this close to the data release itself. So, GDP growth remains solid. That's a deceleration from where we were in the third quarter when things jumped up, but that's kind of the usual amount of noise."

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

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

Video Transcript

BRAD SMITH: One of the hottest debates on Wall Street is when the Federal Reserve will start to cut interest rates. And two big economic data points out this week could play a crucial role in the timing of the Fed's policy decision.

Let's bring in Preston Caldwell, who is the Morningstar Chief US Economist to weigh in here. Preston, great to speak with you. Of the data points that the Fed is going to evaluate most closely at its next meeting, where do you believe that it will give the most weight, especially in its inflation combating pathway that it's been on?

PRESTON CALDWELL: Well, I don't think anyone is expecting a cut to come in this upcoming meeting. It's really more about the March meeting. So we'll get a lot more data before March. However, with that said, I think with this week's data release, obviously, we'll have the PCE price index inflation released from that. And so the Fed will be watching that. Just based off the CPI, we have a pretty good idea what the PCE price index is going to be, probably somewhere in the range of 0.2% to 0.3% month-over-month, which is consistent with year-over-year PCE price inflation, as well as on a core basis continuing to trend down.

And so we think that as of December, PCE price inflation will dip to about 2.9% year-over-year from 3.2% year-over-year as of November. So it's still trending down, as long as the monthly numbers continue to roll in positively. Obviously, the PCE price index is the one that the Fed focuses upon as their inflation gauge. And if that continues to trend, the 2%, then that bodes very positively for a rate cut in March.

SEANA SMITH: So, certainly, some optimism there in terms of the inflation picture, and how exactly you anticipate that's going to play out. Preston, what are you expecting to see on the growth front, though? When we talk about the fact that the US economy is slowing just a bit, how do you think that is going to be reflected there in those GDP prints that we've got coming up?

PRESTON CALDWELL: It's a factor. Because now that the Fed has neared its inflation target, it's going to start considering its other goal of assuring maximum employment, which is tantamount to having solid GDP growth.

Now, our expectation is if you look at the Atlanta Fed's GDP now, for example, it's calling for 2.4% real GDP growth in the fourth quarter. And that's the best predictor when we're this close to the data release itself. So GDP growth remains solid. That's a deceleration from where we were in the third quarter, when things jumped up. But that's the usual amount of noise.

As of now, it's not anything that would cause the Fed to panic and start cutting rates super aggressively. Now, with that said, there's a few other things to consider. We are expecting growth to slow in 2024. And even without that, I think the Fed would reduce interest rates anyways from currently restrictive levels, just based on inflation coming back to normal. But yes, if growth slows further, then that adds further fuel to the fire for rate cuts, obviously.

BRAD SMITH: Is a soft landing firmly in play here for the Fed?

PRESTON CALDWELL: That is my base case. I think what we've learned now that we didn't a year ago is that a soft landing is definitely possible. So it's within the range of possible outcomes insofar as we brought inflation down over 300 basis points over the last year, even its real GDP growth has accelerated. Whereas, a year ago, people were worrying about the stagflation scenario, where inflation remains high, even as growth is weak.

If you have that happen, you have to have a recession to bring inflation back to normal, like we saw in the early 1980s. But we know now that a soft landing is possible. But that doesn't mean that it will be achieved. Because if the Fed keeps rates too high for too long, we could still have a recession.

And on the flip side, if maybes it cuts rates-- the Fed cuts rates too quickly, and the economy remains very strong, then that last mile of inflation could be hard to extricate. And the economy could continue to overheat. But right now, I think a soft landing is the most likely outcome.

SEANA SMITH: All right. You're not alone with that prediction here. But we will see how this all plays out. All right. Preston Caldwell, Morningstar's Chief US Economist. Thanks.

PRESTON CALDWELL: Thank you.