Coming away from Federal Reserve Chair Jerome Powell's first day of testimonies on Capitol Hill, it has become even clearer just how cautious regulators want to be around oncoming economic data and the timing of interest rate cuts.

BlackRock Co-Head of Bond ETFs Steve Laipply sits down with Yahoo Finance in-studio to gauge the Fed's inflation outlook and the delicate balance between its monetary balance and markets, highlighting iShares ETF offerings for riding out potential soft landing scenarios.

Fed officials "want to the have conviction that inflation is going to keep grinding down," Laipply says. "There's a lot of debate about some of the recent inputs into the calculation, but nonetheless, they're trying to make it clear that they are going to keep watching the data roll in and there is a scenario here where I think they're comfortable with the labor market being strong as long as they continue to see inflation fall.

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 Luke Carberry Mogan.

Video Transcript

JOSH LIPTON: Moving on, we are taking a look at the bond market here. Treasury yields pulling back after Fed Chair Jay Powell said the central bank isn't ready to cut rates just yet. Joining us now is Steve Laipply, Global Co-Head of iShares fixed income ETFs at BlackRock. Steve, great to see you.

STEVE LAIPPLY: Thanks for having me.

JOSH LIPTON: So as we mentioned there, Jay Powell testifying today. I think he did, Jay-- Steve, exactly what he wanted to do, which was make no news, right? But what did you make of the testimony? Any big takeaways?

STEVE LAIPPLY: I think he's reinforcing the message that they've been really trying to get the market on side with, which is they want to be patient. They want to watch the data roll in. They want to have conviction that inflation is going to keep grinding down.

There's a lot of debate about some of the recent inputs into the calculation. But nonetheless, I think they're trying to make it clear that they are going to keep watching the data roll in. And there is a scenario here where I think they're comfortable with the labor market being strong as long as they continue to see inflation fall.

JULIE HYMAN: From the bond market perspective, has the Fed done a good job? In other words, the Fed frequently comes under fire. They came under fire-- Jay Powell came under fire in Congress today as he always does. But do you think that the action that we have seen in prices has indicated confidence in the Fed and a smoothness of reaction as well that doesn't indicate alarm?

STEVE LAIPPLY: I think that what you're seeing in the market is a comfort level with financial conditions where they are. I think there is a little bit of concern that conditions loosen quite a lot towards the end of the year. And they want to try to continue to keep those in check, because what they-- I think what they don't want to have happen is see a dramatic loosening and then a view that wealth effects and everything else could start really driving pressures back up.

So they seem to have-- if you want to measure success, they seem to have successfully moved the market off the six cut narrative, right? They moved it off and they pushed the timing back to some degree. So we went from March. And now we're out to June. And we went from 6 down to 3-plus cuts. So they were successful in realigning the market to that view.

JOSH LIPTON: Steve, let's say the Fed does engineer a soft landing, where tricky, but let's say they pull that off, so inflation comes back down to 2% without a downturn. For fixed income investors who are listening right now, if that is the scenario, where would be the opportunity?

STEVE LAIPPLY: So in that case, you can broaden out your portfolio in fixed income. So including-- you do want some ballast, so you should hold, let's call it, some intermediate Treasury exposure for that diversification and ballast. You can then actually get comfortable in that scenario. A soft landing holding high yield is one example.

So for treasuries something like IEF for high yield, you can hold USHY, HYG, HYDB, all of those products will give you that extra income boost. And also in a soft landing scenario, you're not really expecting spreads to widen out. And so you can then rely on that income without having to worry too much about possible drawdowns from spread widening.

JULIE HYMAN: And do you think the soft landing scenario is the most likely one?

STEVE LAIPPLY: I think it is still our base case, you know, with some caveats. There are a lot of things that can happen as we progress forward here. But I mean, it does look-- and there may be a lot of things going on, you know, with, for example, you guys were talking about AI or their productivity effects that are coming in that are allowing the labor market to remain strong without increasing price pressures too much.

So we have to see how those things play out. But I think that's still our base case.

JOSH LIPTON: Let's say, Steve, it's not I don't think a popular opinion, but let's say Larry Summers is right. And Dr. Summers I think, recently said, I think he put it like it was a meaningful risk in his opinion that the next move in rates is actually upwards, not downwards. If that's right, Steve, how does that change the calculus for fixed income investors?

STEVE LAIPPLY: Yeah. So that's an interesting one. So let's just take that scenario. If you do see a strong CPI print or other coincident indicators that would kind of lead them to conclude that we thought we were restricted, but maybe not. And then they may very well start to tighten. So in that case, you go back to the short end playbook.

So what does that look like? That looks like T-bills like SGOV, Treasury floaters like T Flow. You just want to be in short duration. You want to ride those short rates, and short dated tips. So for monetizing that inflation without taking too much interest rate risk. So STIP as an example, would be a way to do that. But you'd have to revert back to that book while you're waiting for this to calm back down. But again possible, but I think the base case is still, they seem to be heading on this trajectory.

JOSH LIPTON: Would you agree with-- is the BlackRock some would you call it meaningful risk or something different?

STEVE LAIPPLY: I'm not sure I would quite know how to quantify it yet. I think we do need to see some more data to really get a handle on that. I mean, is there a non-zero chance? Of course. And I think the recent data that's rolled in, PCE fortunately came in at expectations, but I think some people really wanted to see that number moving down more sharply, and I think what Dr. Summers is saying is that, hey, if this becomes stubborn and sticky, it's a possibility.

JULIE HYMAN: And do you think it is reassuring to the market that Powell is hammering home the message that the Fed will begin to move, even if it's not all the way to 2%, if it's as we, they feel confident it's approaching 2%.

STEVE LAIPPLY: I think that's right because what the risk that they are trying to handle is that the lag effects. So it's one of those things where you have to be a little bit careful because you don't know exactly when you're going to land it. And so if you stay restricted for too long, you'll overshoot, right.

And so it is a challenging thing to be able to get that exactly right. So I think that's why they're being very attentive to it. And if they see the momentum continuing like that, that's when they may decide ultimately, that they can pull back. But they want to see a few more validation points on that.

JOSH LIPTON: A bit more good data, that's the way I'd put it. Steve, thanks so much for joining us today. Really appreciate it.