Federal Reserve Bank of Chicago President Austan Goolsbee spoke to Yahoo Finance regarding how the Fed may decide to cut interest rates within the year, signaling that there may be three cuts. The number and timing of rate cuts may have a large ripple effect throughout the economy.

Principal Asset Management Chief Global Strategist Seema Shah joins Yahoo Finance to discuss Goolsbee's comments and how potential rate cut decisions may impact the market.

"Undoubtedly, the next three months of data are really pivotal in terms of deciding whether or not the Fed will get the rate cuts they're looking for. If on the off chance that you actually start to see see inflation take off again which will then push out rate cuts maybe into 2025 you do start to have a slightly more negative scenario for the economy, but as I said that's not the base case, but it is something we do need to watch out for fairly carefully right now," Shah states.

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

- All right. Well, let's take a look at the major averages, because we have stocks looking to extend the market's record setting rally that we saw at the end of last week. Investors remaining optimistic about rate cuts. More than 70% of traders are betting that the Fed is going to cut rates in June.

Now in a Yahoo Finance exclusive, Chicago Fed President Austan Goolsbee weighed in on his expectations for cuts.

AUSTAN GOOLSBEE: I don't ever like tying our hands or signaling that we've made up our minds or that I've made up my mind before the meetings when we're going to get a lot of data between now and whenever that decision has to be made. We just got to make sure that we're on trend. We never-- I believe that we should never rule out or rule in anything when we've got a whole lot of data to come.

- To break down what this means for the markets, we want to bring in Seema Shah, Principal Asset Management Chief Global Strategist here with us. Seema, it's good to see you here. So just talk to us just how important rate cuts you think are to the market at this point, and whether or not this movement to the upside can continue if we don't get the three rate cuts that the market's currently betting on.

SEEMA SHAH: Hey, great to be on with you. So I think the rate cuts at the moment, they are important. They are certainly important for market sentiment. And you can see that every time the market maybe starts to move out that first rate cut, the future start to flounder a little bit and you start to see investor sentiment wane.

If you were to look forward, though, if you're not going to get rate cuts in June because it's a really strong economy, that should imply that earnings growth is still very strong. And that should be enough to firepower the equity market higher, maybe not to the level that you would get if it was combined with rate cuts, but it's still a fairly positive story. It's only if you don't get rate cuts because inflation is really starting to take off that would certainly be a more negative scenario but it's not our base case at this stage.

- What is the playbook, Seema at this juncture for fewer rate cuts than expected coming into this year, plus higher for longer. Is it still possible to see even more all time highs if that is what actually plays out?

SEEMA SHAH: Oh, absolutely. Look, this is-- historically, very few occasions. But historically, when there has been a soft landing and you combine that with rate cuts, that has been the best foundations for the equity market and for broader risk assets as well. So if that does play through, even if it's just three rate cuts, that's a fairly good story to have.

That should mean that not only the broad equities, but actually parts of the equity space which were fairly unloved last year where valuations are very attractive. So I'm thinking small caps value parts around the world. They can do better. But some of them are very much dependent on the rate cut, although the broad equity market is most based on the earnings story.

- Seema, given what we heard from Austan Goolsbee on air with us yesterday and given what we heard from Jay Powell last week, is that getting all up-- how does this affect or does it at all affect recession risk right now, given the fact that the economy once again has remained so resilient up until this point?

SEEMA SHAH: So think it was very interesting to hear from Austin on that because he's making some really important points, which is this is not forward guidance. This is their best guess assuming that the economy moves in the way that they're expecting it to. But undoubtedly, the next three months of data are really pivotal in terms of deciding whether or not the Fed will get the rate cuts that they're looking for.

If on the off chance that you actually start to see inflation taking off again, which would then push out rate cuts maybe into 2025, you do start to have a slightly more negative scenario for the economy. But as I said, that is not our base case, but it's something that we do need to watch out for fairly carefully right now.