March might be too early for rate cuts, economist explains

Traders pared back their bets on Fed rate cuts this year, currently pricing in five interest rate cuts before the end of the year, after December's strong jobs report weakened the case for lower rates.

But that may still be too optimistic, according to Jefferies Senior US Economist Thomas Simons, who warns the Fed is in 'unchartered territory.'

“We are in relatively uncharted territory given the impact of communication on financial conditions,” Simons said on Yahoo Finance Live. “But at the end of the day, the playbook has been set from much longer ago… March may be a little bit too early to start thinking about rate cuts, but it’s certainly reasonable in the second half of the year.”

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 Eyek Ntekim.

Video Transcript

SEANA SMITH: Thomas, I'm curious to get your perspective on how this compares to when you've done this prior when you're trying to game out I shouldn't necessarily just say rate cuts. But when you're trying to game out Fed officials and policymakers and what that next move is going to be, how much more difficult is it much more difficult this time around, given the fact that the scenario that we are in right now is almost unlike anything we've seen in the past?

THOMAS SIMONS: Yeah, no I mean, it's extraordinarily difficult, right? I mean, for better or worse, the majority of my career has been in the sort of 2010s period where Fed rate forecasts weren't all that hard to do, right? Then they've got a lot easier to do when the Fed started raising rates because they just told us that they were going to raise rates 75 basis points at a time, right?

And now I think you see the difficulty not only on the private side but also with the SEP, right? Like, when the Fed puts out their dot plot, you can see in the post-meeting press conference this sort of like pick apart question process of the inconsistencies of one thing versus another. And you work-- you have to deal with that on the private side too, right? So I do think that we are in relatively uncharted territory just given the impact of communication on financial conditions and the focus on the markets and how that affects the economy.

But at the end of the day, I think that it's actually the playbook has been set from much longer ago, right? Which is this nature of the economy overheats a little bit, Fed raises rates, eventually they leave him high for too long, and then things start to slow down, right? So I don't think it's maybe- March maybe a little bit too early to be starting to think about that, but certainly in the second half of the year, I think that that's reasonable.