Investors are closely watching for signs of an impending Federal Reserve rate cut following February's hotter-than-expected CPI print. SoFi's Head of Investment Strategy Liz Young joins Yahoo Finance Live to dissect market reactions.

Young notes that markets are not responding to the CPI data itself but rather to Fed Chair Jerome Powell's recent dovish comments, which suggested a willingness to cut rates later this year. However, Young emphasizes that the Fed is wary of allowing inflation to become "entrenched," a quality that is measured according to inflation expectations.

She highlights that the rise in breakeven rates, a measure of inflation expectations, signals a risk that the Fed "has more stamina and a higher threshold for pain than stocks," which could impact investors if the central bank opts against rate cuts.

Young describes the Fed's communication on rate cut expectations as "intensely vague," with Powell continuously stating the Fed's need to "feel confident" about reaching the 2% inflation target before initiating cuts. "That last five pounds that you're trying to lose is always the peskiest, and that's where we're stuck. And the thing that's keeping it stuck there is services inflation," Young tells Yahoo. She adds that the Fed will have to acknowledge the less-than-promising inflation data, which presently indicates a "plateau."

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 Angel Smith

Video Transcript

JULIE HYMAN: Let's widen things out once again and talk about what's going on in the market today. With stocks higher as inflation pressures remained persistent in February, now with attention shifting back to Jay Powell. Investors are trying to map out when that first rate cut may be coming.

For more, let's bring in Liz Young, SoFi Head of Investment Strategy. Hey, Liz. It's great to see you.

LIZ YOUNG: Hello. Good to be here.

JULIE HYMAN: So you looked at these numbers. This morning. And I have to say you might have expected to see quite a different equity market outcome with those numbers coming in a little bit hotter than estimated. So what happened?

LIZ YOUNG: What I think is going on right now, and I don't want to say that the macro data doesn't matter. It certainly does matter. But I think equity markets are, first and foremost, queuing off of what Jerome Powell sounded like last week.

He sounded pretty dovish. He sounded like they were still planning on cutting rates at some point this year, which is what we were expecting. And if you look at the Fed funds futures, they didn't really move at all regardless of the fact that CPI came in hotter than expected.

So still looking for that first cut possibly in June, and still looking for about three cuts by the end of the year. So that didn't change much at all. When you look at what the numbers were, we got some hotter CPI numbers in January.

We've heard the explanation that this is seasonal. This happens in the beginning of the year. So I think we had a little bit of a buffer to expect slightly hotter numbers than what the survey said.

But like you said, the odd reaction here is that you've got tech leading today. So that sector that's the most interest rate sensitive on a day when yields are up in response to inflation data. And the other thing I would point to is the Fed cues off of inflation expectations as well because the last thing they want is for inflation to become entrenched.

And the way that they measure that, one of the ways they measure that is by looking at inflation expectations. And a way that you can measure inflation expectations is by the break even rates. And if you look at the two-year break even rate, it's gone up more than 75 basis points since the end of November.

That is a really big move. The 5 and 10-year rates haven't moved much. But that two-year rate has gone up quite a bit. So that means that inflation expectations are rising.

And the risk here, I think, really to the equity market is that the Fed has more stamina, a higher threshold for pain than stocks do. So people keep buying. And what if the Fed says, we're not ready to cut yet because the data doesn't tell us that it's the right time?

BRIAN SOZZI: Liz, fascinating comments then. So let's think through to the next FOMC meeting. Where do you see the dot plots landing?

And how do you think Powell will characterize? What will be the tenor of his tone will it be hawkish, dovish? Is he going to have to walk back some of the expectations that have been built in for these rate cuts, which remain today?

LIZ YOUNG: Well, luckily for him, they haven't given many concrete expectations about those rate cuts. They've been intensely vague about what they intend to do. And I think that's been on purpose, and that's been the safe route.

He's continued to say that phrase of we need to feel confident, that inflation is on a sustainable path toward 2%. What we're seeing in the data, obviously, CPI is different than PCE. But what we're seeing in the data is that it's plateaued.

So it's not necessarily going back up at a concerning rate, but it has plateaued. We had this huge drop off of peak inflation. And now we're at this place where I heard the joke recently that last 5 pounds that you're trying to lose is always the peskiest. And that's where we're stuck.

And the thing that's keeping it stuck there is services inflation. Now, we can explain some of that away by saying it's all shelter. It's everything in the housing market that's skewing it. And that's such a lagged effect.

And some of that is true. But we're starting to see other little pockets pop-up as problems something like auto insurance. We've never talked about auto insurance being an issue before. And now, suddenly, auto insurance is an issue.

So I think what we're going to see for the next few months is inflation data that isn't as promising, perhaps as we were hoping it would be. And I think Powell is going to have to acknowledge that. But to be fair, I think he has acknowledged that. And the market just is choosing to decide for him what we think the Fed is going to do later in the year.