Many on Wall Street have their focus set on the Federal Reserve, watching for any further clues as to when it will cut interest rates. Some are questioning how many rate cuts there will be, but should the focus be more on when they will start cutting?

Kevin Mahn, Chief Investment Officer at Hennion & Walsh, joins Yahoo Finance to give insight into what could happen if the Fed continues its policy of higher for longer interest rates for longer than most expect them to.

Mahn explains that before the Fed cuts interest rates, they need to see "two consecutive quarters of a slowing economy before they can feel good about actually cutting interest rates." When asked about where to see that slow down, Mahn says: "If you look at the GDP now estimate, the recent from the Atlanta Fed, they're forecasting fourth quarter GDP to slow to 2.4%. Still good growth, but much lower than third quarter 5.3%. Then looking at the Fed's own projections for GDP, 1.4% this year and staying below 2% all the way through the end of 2026. If that is, in fact, true, that is an economic slowdown. How does that economic slowdown actually turn to a period of economic growth? The Fed starts cutting interest rates, providing, of course, that inflation continues to moderate."

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

JOSH LIPTON: We are exactly two weeks away here from the Fed's next meeting. Consensus is that it will hold steady, but the optimism over the first rate cut in March is slipping. Markets now to roughly 57% probability the Fed cuts in March, which is down 10 percentage points from just last week.

And our next guest says one risk for the market is keeping rates too high for too long. Joining us now is Kevin Mahn, Hennion Walsh Chief Investment Officer. Kevin, it's always great to have you on the show. Thank you for joining us.

KEVIN MAHN: My pleasure.

JOSH LIPTON: So help us make sense of it, Kevin. So what are your expectations for the Fed in 2024? When do you think they're going to cut, Kevin, and by how much?

KEVIN MAHN: Sure. We'll start with what the Fed's expectations are. As it stands right now according to their most recently released dot plot chart, three cuts next year of 75 basis points, another 100 basis points in cuts in 2025, and yet another 75 basis points and cuts in 2026.

What I find interesting is that they're forecasting GDP growth to slow to 1.4% next year. They're also forecasting inflation to stay at 2.4%. So if they're going to be cutting interest rates this year when inflation doesn't come back to their magical 2% target, it tells me they're more concerned about this economic slowdown potentially moving into recessionary territory than they are worried about inflation staying above 2%.

Where am I? I'm in that four rate cut camp, 25 basis points each, likely not starting until the second half of the year. The Fed needs to see two consecutive quarters of a slowing economy before they can feel good about actually cutting interest rates.

MADISON MILLS: But where do investors look for clarity on that? Because I'm not seeing the slowdown. And my sources that I've spoken with today, who are now reversing their calls on a June cut, are saying that they don't see the slowdown either, and they're worried that that's why the Fed is going to have to go higher for longer.

KEVIN MAHN: Sure. If you look at the GDP now estimate, the most recent one from the Atlanta Fed, they're forecasting fourth quarter GDP to slow to 2.4%. Still, good growth but much lower than third quarter 5.3%. Then looking at the Fed's own projections for GDP, 1.4% this year and staying below 2% all the way through the end of 2026.

If that is, in fact, true, that is an economic slowdown. How does that economic slowdown actually turn to a period of economic growth? The Fed starts cutting interest rates providing, of course, that inflation continues to moderate. So we're going to have to see the proof of that economic slowdown over these next three quarters. But according to the Federal Reserve, it's coming. And it's an unintended consequence of all those aggressive rate hikes that they've put in place since March of 2022.

JOSH LIPTON: And, Kevin, should it matter to investors when they start cutting? Does it matter if it's first half or back half?

KEVIN MAHN: I'd be very reticent to tell individual investors to try and play the Fed guessing game. I've been doing this for over three decades. I don't play the Fed guessing game well. But I think it's fair to say over the next three years, interest rates are going to be lower, yields are going to be lower, inflation should be lower, and economic growth should start to moderate.

So with that type of outlook in mind, investors should start positioning portfolios today for what's likely to happen over the next three years. Don't think so short term. Don't think about today, this week, or this quarter. Think over the course of the next three years to next decade. And there's tremendous opportunities in both stocks and bonds that haven't participated in the rally that took place last year, which was largely accounted for, of course, by those seven large-cap technology stocks.