MKM Partners Chief Economist and Macro Strategist Mike Darda joins Yahoo Finance to analyze recession odds in 2024 after the Federal Reserve's aggressive quantitive tightening campaign.

While Darda notes the economy is "technically" experiencing a soft landing presently — with slowing growth and steady unemployment — he warns the landscape echoes conditions that have preceded downturns historically.

Despite markets pricing in "a rosy scenario" of further interest rate easing and double-digit earnings gains, Darda argues "it makes sense to talk about what could potentially go wrong." In his view, investors have gotten too optimistic about a soft landing panning out, rather than recessionary risks remaining elevated amid still uncertain Fed impacts.

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 Angel Smith.

Video Transcript

JULIE HYMAN: You are raising some flags here that we could still indeed see a recession. That a soft landing-- that it seems like a sort of consensus here-- is not assured.

MIKE DARDA: Absolutely. So thanks for having me on. And great Bitcoin discussion by the way, an important one. So right now the economy is in technically a soft landing. Growth has slowed, but it hasn't turned negative. The unemployment rate has leveled off and has only really ticked up slightly.

But if you look back at past business cycles, that's exactly what it looks like in a late cycle environment when there's a transition from above trend growth to trend growth. And then the next phase is a downturn, a recession with the unemployment rate moving up in a material fashion. And so we're sort of in a transitional stage here, but with the risk markets doing what they did last year, putting up a big year.

There's just a tremendous amount of optimism that the soft landing is in the bag and that that will be what continues to unfold in 2024. So maybe I'm the last holdout. I mean, almost everybody is pretty optimistic at this point.

JOSH LIPTON: You know, a little known fact about Mike Darda, Julie Hyman, economist, renowned strategist, black belt in Brazilian jiu-jitsu.

JULIE HYMAN: I knew this, but, yes, not everyone does.

JOSH LIPTON: Which is why the viewers should know, I approach Mike very, very respectfully with my questions. Mike, here's my-- so you're urging sensibly some caution here on the economy, Mike. I'm wondering how that influences, Mike, how you're thinking about the Fed and their rate-cutting strategy here, Mike. Are you in the camp with the markets? Do you expect five or six cuts this year or no, it's going to be more like three?

MIKE DARDA: Yeah, great question. So I do think the Fed will be cutting rates this year, but I don't think they're going to drop rates five or six times in the context of a no-landing economy with double-digit earnings growth in a firm bid under risk assets. And that's really the consensus view, which I think is a head scratcher.

In my mind, there are really two tail risks here. One is that we actually do fall into recession and then the earnings expectations are going to be too high. If it turns out and that's incorrect, I mean, what you've seen in these other business cycles when the unemployment rate levels out, if it doesn't break higher, it tends to keep falling. And that would mean not only above trend growth, but it would mean the Fed would likely be back in the rate hiking game again and these expectations for rate hikes would have to be fully priced out.

So those are the two tail risks. This rosy scenario where you just have a baby soft landing, a double-digit rise in earnings, and six rate cuts anyway, I mean that's essentially priced in. So it makes sense to talk about what could potentially go wrong, in my opinion.