Amid ongoing uncertainty surrounding Federal Reserve rate cut expectations, The Wall Street Journal's Chief Economics Correspondent Nick Timiraos joined Yahoo Finance to share his outlook on the central bank's monetary policy.

Timiraos outlines three potential scenarios the Fed may face. In the first scenario, he describes strong growth with inflation "making steady progress'" toward the Fed's target. The second scenario involves strong growth but "inflation [remaining] sticky" and still higher than the target. Timiraos warns that the third and worst-case scenario is "growth contraction, with high inflation."

With the federal funds rate above the inflation rate and a slowdown in wage growth, Timiraos says, "It's gonna require [the Fed] to soften the labor market more." However, he acknowledges that the labor market is already showing signs of cooling.

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This post was written by Angel Smith

Video Transcript

- Three consecutive months of hotter than expected data have complicated the Federal Reserve's path ahead. It's now a matter of if not just when, interest rate cuts will come. Joining us now is Wall Street Journal's chief economics correspondent, Nick Timiraos. Thank you for joining us here today. What's going on with the Fed here? It doesn't seem like we're going to get those rate cuts in June. We started out the year expecting six to seven, depending on how you measure it, and now we're barely holding on to two.

NICK TIMIRAOS: Well, I think there are three, there are three basic scenarios here for the Fed. One, is that you have strong growth with inflation making steady progress lower. That's where we were in December, and it's where the market hoped we would be right now, but it's not where we are after the reports in January, and February, and then for March, this week.

Second scenario is strong growth, but inflation stickier hanging closer to 3% using the Fed's preferred gauge than to 2%. That's, that could be where we are now. It's not the worst case scenario. The third scenario, which I would say is the worst case scenario, is growth contraction with high inflation. So, it's, I think, the golden path that Austan Goolsbee keeps talking about, that's not where we are right now.

But I think the question going forward is, are we still going to see bumpy but, but progress down in inflation. You can make a case for that. Or are we going to stick closer to say 2 and 3/4 on core inflation using the PCE, and with decent growth. So I think those are the two scenarios you have to put more mass on the second one being a possibility now.

- Nick, what will it take to get inflation back to the Fed's target? When you're speaking to economists, what do they tell you?

NICK TIMIRAOS: Well, I think, if you look at where things are today versus where they were a year ago, you have a funds rate that's still a little bit higher, and inflation rate that's lower. So you now have a funds rate that's meaningfully above the inflation rate. I think the other big change is that wage growth has continued to slow.

So a year ago, I think the big worry was the Fed's going to have this last mile that's going to be really difficult, because wage inflation is going to require them to really soften the labor market more, and this week obviously there are more concerns now about the last mile. But you still see wage growth trending lower, you see signs that the labor market isn't as overheated as it was.

And so I think there's a question here over what's the, what's the inflation process? What's happening with inflation right now? One story would be that aggregate demand is very strong, nominal income growth is just allowing businesses to take more, to take price more. And you see it, some quarters it's in goods, now it's in services. And so that's a concern obviously for the Fed.

The other story would be more of a bottom up explanation that says, look, car prices were high, very high three years ago, two years ago. And so if I wrecked my car, my car insurance company took a bath on it because they hadn't accounted for car prices going up so much. And so now they're having to raise insurance prices. And this week in the CPI, we saw motor vehicle insurance up 20%.

But if car prices are no longer going up so much, then you might have more confidence that this is just a ripple effect through the economy, and that'll settle out. But I think the jury's still out right now on which of those inflation stories is going to be the story we look back on in two or three years and say this was the right one.