Richmond Federal Reserve President Tom Barkin warned "a soft landing is increasingly conceivable, but in no way inevitable" in prepared remarks during a speech in North Carolina as traders pared bets on Fed rate cuts.

Deutsche Bank Chief US Economist Matthew Luzzetti told Yahoo Finance Live he sees rate cuts starting in June.

"Our baseline is that the Fed begins to cut rates in June, that they cut rates by 175 basis points over the course of the year. That's a little bit delayed relative to market pricing at the moment," Luzzetti said. "It was quite aggressive relative to market pricing a month or two ago. I think key to our view is that you get inflation data which is a little bit firmer, over the next few months, that gives the Fed some pause for a rate cut by March, but also that the labor market deteriorates more than what the Fed anticipates which allows them to cut rates more aggressively."

Editor's note: This article was written by Nicholas Jacobino.

Video Transcript

SEANA SMITH: All right. Well, let's talk a little bit more about what we could see from the Fed this year. Investors are getting the first bit of Fed speak in the new year. Richmond Fed President Thomas Barkin saying this morning that while a soft landing is, quote, "increasingly conceivable, the potential for additional rate hikes is still on the table."

Now, the minutes from the Fed's December meeting coming out at 2:00 PM Eastern time today, all eyes are gonna be on whether or not officials walk back Fed Chair Jay Powell's dovish message to Wall Street last month.

Now, if they do, the market's desire or maybe confidence in aggressive rate cuts could potentially be on the line. We wanna bring in Matt Luzzetti. He's Deutsche Bank's Chief US economist. And Matt, I'm just gonna point blank ask you here, what are you expecting the Fed to do this year in terms of the timeline of those potential rate cuts?

MATTHEW LUZZETTI: Yeah, so our baseline is that the Fed begins to cut rates in June, that they cut rates by 175 basis points over the course of the year. That's a little bit delayed relative to market pricing at the moment. It was quite aggressive relative to market pricing, you know, just a month or two ago.

But I think key to our view is that you get inflation data, which is a little bit firmer over the next few months, that gives the Fed some pause for a rate cut by March, but also that the labor market deteriorates more than what the Fed anticipates, which allows them to cut rates more aggressively over the back half of the year. That's our baseline outlook. But we've seen certainly the market move pretty aggressively relative to that.

- Yeah. You know, It's an interesting call because a lot of people are looking for a continuation, like a smooth path for the Fed, basically. Right? We rose-- you know, we kind of gradually got to the peak in 2023. 2024, it will gradually come down. What specifically are you looking for in the labor market, call it third quarter of next year, that's gonna make the Fed aggressively move to cut rates?

MATTHEW LUZZETTI: Yeah, I think what we typically see is the Fed, you know, goes up kind of gradually and then comes down very quickly. Takes the elevator down in terms of rate cuts. And that's because they typically respond to recessionary-type dynamics where they get worried about the labor market softening, consumer softening. And so that's what we're anticipating. But it's not nearly as bad as a typical recession.

So we have the unemployment rate rising to about 4 and 1/2% by the middle of the year. And if you have that plus an inflation rate that is very close to the Fed's target at that point in time, I think that the Fed just has ample scope to cut rates. Because they're already at 5.3% on the Fed funds rate, they think normal is closer to 2 and 1/2%.

- And I guess in thinking about the labor market, we're gonna have the jobs report on Friday. Quote unquote, "most people," it's all about the nonfarm payrolls number. Are there other indicators that you guys are gonna be focused on as we get into, you know, March, April as we kind of get towards this move towards 4 and 1/2% on unemployment.

MATTHEW LUZZETTI: Yeah, I mean, obviously, the unemployment rate is really important there. So it was 3.9% just two months ago, came back down to 3.7%. So does that retrace some of the improvement that we've seen?

Going under the hood of that, we look at something called permanent job losers. So this is why are people unemployed? That's been rising actually pretty substantially. It's higher than it was in 2019, showing you some deterioration in the data.

The other thing that I would look at is the breadth of job gains. And there's a really interesting data point. So if you take out leisure and hospitality, education and health, the private sector has actually contracted in terms of jobs over the past six months. So it's been very narrow, very concentrated in terms of a few sectors. I think that will be important for as we look at the labor market over the year ahead.

SEANA SMITH: Matt, how worrisome is that?

MATTHEW LUZZETTI: Look, you don't see that ever outside of recessions. Now there's a lot of indicators right now that you don't see ever outside of recessions, the LEI, leading economic index, some of the survey-based indicators.

So I would still say, look, we're producing a good amount of jobs. We've seen the hiring rate stabilized. The quits rate has stabilized. We'll get the JOLTS in about an hour. That'll be a really important read into the data.

It's somewhat worrying. You do wanna see broader job gains because it just gives you greater resilience from the labor market. But so far, it clearly hasn't spilled over into something more negative for the labor market.