The Federal Reserve has announced its decision to leave interest rates unchanged for the remainder of 2023, leaving investors unsure about what may lie ahead for the US economy and markets in 2024.

Vanguard Senior Economist Andrew Patterson and Andrew Levin Dartmouth College Professor of Economics join Yahoo Finance Live to weigh in on the profound impacts the COVID-19 pandemic has left on the US economy.

“We’re not done here, these core measures of service inflation are high and workers want to catch up with the cost of living, and those things are not over yet," Levin, a former Federal Reserve Board Special Adviser, notes.

"Whether you're talking about inflation... [or] labor market reports, nuance is going to matter in those going forward as we try to navigate 2024 and anticipate when the Fed is going to start cutting and why," Patterson states.

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

Video Transcript

JULIE HYMAN: Have there been profound structural changes in the US economy because of the pandemic, because of whatever, or do you think that it is sort of-- not to bring up the word "transitory--" but effects that mask that it's really just how it always is, that the Fed-- the interest rate transmission mechanism works like it always does, and that a recession is going to happen, like it typically does when you see increases like we've had?

ANDREW LEVIN: Well, again, usually the recession would happen before the Fed starts easing. So it's definitely-- there is a risk case here where inflation-- supercore inflation, other measures of service stay high, and the Fed doesn't ease much at all in the first half of next year. And that starts to slow the economy. The stock market-- bond yields start going back, up and everything goes back to where it was a few weeks ago.

And in that case, the risk of a recession in the second half of the year would certainly start to loom more than it does right now. It just depends a lot-- again, I think this is why we're all eager to hear what Fed Chair Powell has to say today. He's the sober kind of physician in the room, trying to reassure the patient but not to make the patient stop taking the medicine.

And so-- that we're not done here. These core measures, you know, of services inflation are high, and workers want to catch up with the cost of living, and those things are not over yet. So I would say, absolutely, that, if anything, the effects of the pandemic are more longer lasting than we might have thought, that we're now two years, you know, since it seemed like the worst of it was over. But the economic effects are continuing and may continue now for quite a while to come.

- And Andrew Patterson, I want to get you in here, as well, almost kind of responding to what Professor Levin is talking about there. Get your take on inflation, Andrew, where we are and just how you see the trajectory of inflation playing out from here, the puts and takes.

ANDREW PATTERSON: Yeah. Professor Levin talking about some of the concerns around supercore or services remaining high. But if you look at it, you know, over 50% of the basket of services in CPI still remains above 4%. So that's certainly concerning. It's something that the Fed's going to be keeping an eye on, right? Whether you're talking about inflation reports, whether you're talking about labor market reports, nuance is going to matter in those going forward as we try to navigate 2024 and anticipate when the Fed is going to start cutting and why, whether that's for a recession or because a soft landing is achieved.

Underlying measures-- not just looking at headline numbers like the unemployment rate, the actual inflation rate, but what's happening to services? Are those starting to come down as much as goods did? What's happening to long-term unemployed? Or rather, what's happening to part-time-- for economic reasons? Are those numbers starting to creep up? Which may belie, you know, a more positive non-farm payroll headline number. So again, heading into 2024, as you try to navigate this last mile, if you will, of inflation back towards the Fed's target, nuance is certainly going to matter.