With a litany of economic data released this week, including Friday's Personal Consumption Expenditures (PCE) Index, the debate as to when the Federal Reserve will cut interest rates continues. While some parts of the economy have cooled, the US labor market has consistently reported huge jobs gains. On top of managing its dual mandate for inflation, the Fed faces mounting policy challenges as the 2024 presidential election draws closer.

PGIM Fixed Income Chief US Economist Tom Porcelli joins Yahoo Finance to give insights into the Fed's next policy decision as the country gears up for election season as well as dealing with current market conditions (^DJI, ^IXIC, ^GSPC).

On the timing of cuts around an election cycle, Porcelli states: "When the Fed has adjusted policy around an election, there's been an overwhelming reason for them to do it. Right now, I would argue, it's probably going to be pretty debatable, and I think in a debatable backdrop, I think the Fed would want to veer away from adjusting policy... If you don't get the string... like [Fed Chair Jerome] Powell keeps on saying he wants to see a string of good inflation reports, that will push the July cut, which they could potentially do, way out to December. Because I think, again, around an election, unless... it's an overwhelming sort of reason for them to cut, I think they're not going to be able to go in September or November, so that would push it out to December."

For more expert insight and the latest market action, click here to watch this full episode.

This post was written by Nicholas Jacobino

Video Transcript

SEANA SMITH: Tom, so what does it exactly mean then for the market if we don't see a cut before the end of the year? What kind of volatility could that ensue? And then as you look ahead to 2025, where does that leave your expectations there?

TOM PORCELLI: Yeah, it's such a great and important question because I think, look, you know, we all seem to live in, like, a snapshot of time, right? And so, like, you know, you look at, like, a payroll report or you look at a PCE report, which we'll get on Friday, and say, oh, you know, things look good. And I don't doubt that, right? Like, I don't think, like, the snap-- I don't doubt for a second the snapshot in time is that things will look pretty good.

And I think that might persist, you know, certainly even over the balance of this year. I think the real challenge, though, comes in '25 because I do think that the reality is rates are in pretty restrictive territory. You are starting to see some early, I stress early, signs that there is some sort of, you know, stress starting to build in the labor backdrop. Again, I want to stress, yes, I get it. We're printing 270,000 jobs.

But I'm saying it's-- you know, labor or forecasting anything requires that you sort of drill deep. And so I do think that there are some signs that things are starting to slow down, to some extent. And what I would stress is when I look at the consumer in particular, what we have to keep in mind is the consumer is-- the only way the consumer has been able to drive consumption is to really drill deeper into saving. I mean, they're really using saving to support current consumption and, of course, using credit.

These are not totally sustainable. So what I would argue is as you roll into '25, I think things start to look a little worse, particularly if the Fed has not cut rates.

MADISON MILLS: Given that and given the timing of an election coming up, does that sort of force the Fed to either cut in June or have to wait until at least the end of this year?

TOM PORCELLI: Yeah, this is a really important question too. And what I would say is this. Yes, history is littered with examples of the Fed adjusting policy around an election. But I would also say is when the Fed has adjusted policy around an election, there's been an overwhelming reason for them to do it. Right now, I would argue it's probably going to be pretty debatable. And I think in a debatable backdrop, I think the Fed would want to veer away from adjusting policy.

So I think you're quite right. If you don't get the string, right-- like, Powell keeps on saying he wants to see a string of good inflation reports-- that will push the July cut, which they could potentially do, way out to December because I think, again, around an election, unless, you know, it's an overwhelming sort of-- you know, an overwhelming reason for them to cut, I think they're not going to be able to go in September and November. So that would push it out to December.

SEANA SMITH: Tom, talk to me just a little bit more about that and exactly what it would take in order to justify some sort of move surrounding the election.

TOM PORCELLI: Yeah, I think it would basically take not just inflation really sort of softening up here, which, again, we do think will happen. It's just not going to happen in a linear way, right? It's like you're not going to get month after month of improvement. There'll be a couple of months where, you know, it's sort of that seemingly, the improvement is stabilizing.

So I think it's not just inflation. I think it's labor at this point. I think you would really need to see labor start to slow down. We do think that by the end of the year, you could certainly see a higher unemployment rate. But it's going to be the combination of labor and inflation that I think would get the Fed to go in September and November. But again, I stress, I think the hurdle is growing incredibly-- increasingly higher for that to happen.