Stock market indexes (^GSPC, ^IXIC, ^DJI) fell after the Fed's FOMC meeting minutes showed interest rates will stay restrictive until inflation meaningfully drops toward regulators' 2% target. While fiscal tightening may have peaked, Lafayette College Chief Investment Officer Krishna Mermani expects a gradual descent in economic pressures.

As sectors like retail slow, supporting disinflation, Mermani believes the groundwork is laid for a soft landing scenario. He says the slight market selloff partly reflects the Fed's rapid tightening effects, signaling the economy will naturally decelerate. However, the speed of slowing remains uncertain. If conditions improve without reaccelerating inflation, Mermani notes to Yahoo Finance that the Fed will have successfully completed the soft landing investors are looking for.

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

Video Transcript

- Major averages trading slightly lower today as the fed gives no indication there's going to be rate cuts anytime soon. The minutes from the last FOMC meeting revealing monetary policy will need to remain restrictive until data shows inflation, cooling more towards the fed's 2% target. Joining us now in studios, Krishna Memani, Lafayette College chief investment officer. Thanks for being here, Krishna.

KRISHNA MEMANI: Thanks for having me.

- Good to see you in person. Thanks for coming in. So the minutes today just seem to confirm, maybe solidify the market's view that we are not getting any more increases, even though inflation still remains elevated. So how should investors be thinking about this?

KRISHNA MEMANI: So I think the right way to think about it is inflationary pressures have certainly peaked. And therefore, tightening pressures have peaked as well. The question is, how fast do we get to 2%? And what would be the pace? And how does the fed kind of operate in that framework?

I think for the near term, the downward trajectory probably is going to be slow. But I think things are building up where the pressures could actually-- of inflation going down actually increase quite substantially. If you look at used car prices, for example, and you look at retail sales, things are slowing down. And in that environment, inflation can go down much faster than what the fed is anticipating today. May not be today, but in the first quarter of next year, second quarter of next year, things could change dramatically.

- And then-- and, Krishna, you know, the-- we had this nice rally in the equity market as investors have become much more comfortable with this idea that the fed is going to really stick the soft landing. It's a rare tricky thing. But I think investors are comfortable with that scenario. Is that what you forecast in 2024, a soft landing?

KRISHNA MEMANI: Absolutely. I think everything right now is looking like it is about a soft landing rather than a hard landing or inflation re-accelerating. I think when people talk about it being rare, I think they're talking about a regular economic cycle. This isn't a regular economic cycle.

We wouldn't have gotten to where we got to and we couldn't have come down as fast as we did from an inflation standpoint if it was a regular cycle. And I think all those pressures are fading. And I think as the fed tightening impacts the real economy, things are going to slow down. The question is, how fast do they slow down?

My-- and I think for the soft landing, what you're looking for is really things trending to slow down rather than re-accelerating. If things don't re-accelerate, we have a soft landing, for sure.

- And so all of that being said, what happens to stocks then in 2024?

KRISHNA MEMANI: So I think-- that's actually a good question because what happens to stocks in 2023 is dramatically different than what may happen to stocks in 2024. Because right now, we are probably at the top end of the trading range until things kind of improve meaningfully. But for 2024, especially in the second half of 2024, you have lots of ingredients for things to fall in place in a really good way.

And I would say, you know, inflation is showing-- slowing down, growth continuing-- I mean, growth not like the third quarter of last year but with a two handle. That's very reasonable. Earnings continuing to go up. And most importantly, real rates coming down because the fed thinks that it has kind of landed the soft landing, if you will.