Federal Reserve Chair Jerome Powell testified before Congress on Wednesday morning. During his testimony, Powell claimed that while interest rate cuts were likely, the Fed will take more time before making any concrete decisions on rate cuts, opting to wait for more data on inflation.

Vincent Reinhart, Dreyfus and Mellon Chief Economist, joins Yahoo Finance to discuss the testimony from Fed Chair Powell and its possible implications for the market.

Reinhart outlines the "tough spot" the Fed is in regarding interest rate cuts, discussing how their timing may seem political in the midst of a campaign season. He adds that "monetary policy is all about balancing risks, and what you want to do is make the mistake that is easiest to fix and least probable. And we've heard it in his testimony, and it's behind a lot of his responses thus far this morning: if the Fed eases too soon before inflation is assuredly at its goal, market participants are going to rally a lot, be really excited, financial conditions will ease. And if inflation doesn't fall, it's going to be even more stubborn because of the easing of financial conditions and it will be very difficult and damaging to the Fed's credibility to try to take that back. So that's a hard mistake to fix."

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 Nicholas Jacobino

Video Transcript

RACHELLE AKUFFO: Well, Fed Chair Powell reiterating the Federal Reserve's stance of patience when it comes to rate cuts in his testimony on Capitol Hill, saying they would like to have more confidence on inflation before any shifts in Fed policy. So what does that signal for the rate cuts this year? We have Vincent Reinhart, Dreyfus and Mellon chief economist.

Thank you for joining us this morning. So as we're seeing here, Fed Chair Powell still toeing that line of being cautious and people wondering, when is that data going to be enough? What is that signaling to you about the pace of rate cuts ahead?

VINCENT REINHART: Chair Powell is in a difficult circumstance. The economy pretty much suggests that it would be wise for the Fed to be patient, to slow up, and when it actually decides to pivot toward policy, ease. But it's an election year.

And as a politic leader of his institution, he's got to pick his spots. It's about the tone and feel. But that's hard to describe, certainly, to Congress that they may move, in our forecast, in June because it's the slow spot in what will be a terrible campaign season.

AKIKO FUJITA: With that said, though, I mean, doesn't he lose either way? If he keeps rates where they are, he's going to get hammered by one side. If he cuts rates, he's going to be seen as, you know, helping the administration, at least those who are looking at this from a political prism.

VINCENT REINHART: Yeah. Oh, there is no question that the Fed will be blamed for whatever it does, even if it does nothing. That's one reason the legislature sets up an independent Central Bank. It gets to blame somebody else for the performance of the economy and the level of rates.

And you're seeing Congress do that right now. But think about it. If it waits to the right spot just when they've got confidence, given the macro data that inflation is going to settle to goal, would you want to be the Fed chair to tighten in September or October, just before the election? And if it waits till after the election, doesn't that look political too? The Fed's just in a really tough spot.

RACHELLE AKUFFO: Indeed. So, Vincent, I know that we've heard Chair Powell talking about the risks of, you know, thinking the worst of inflation is behind and then having to sort of step in once again. But talk about the risks then of waiting too long versus cutting too soon and the risks that that poses to the economy.

VINCENT REINHART: Monetary policy is all about balancing risks. And what you want to do is make the mistake that is easiest to fix and least probable. And we've heard it in his testimony, and it's behind a lot of his responses thus far this morning.

If the Fed eases too soon before inflation is assuredly at its goal, market participants are going to rally a lot, be really excited. Financial conditions will ease. And if inflation doesn't fall, it's going to be even more stubborn because of the easing of financial conditions.

And it will be very difficult and damaging to the Fed's credibility to try to take that back. So that's a hard mistake to fix. Suppose they eased too late? The economy softens. Hey, they've been behind the curve before. Markets will get used to it.

AKIKO FUJITA: So, Vincent, we're talking about a lot of external factors here. Obviously, the economic data is the data. You're an economist. What does that data tell you about when the Fed should act, putting aside any political questions and then any criticism? I mean, when you look at the data as is, what does that tell you right now?

VINCENT REINHART: So if this were not an even-numbered year, divisible by four, then I would say that they should wait. Ideally, if they really want to realign the nominal federal funds rate in light of lower inflation down by, say, 3/4 of a percentage point this year, they should wait till September. Got three meetings left. Do 25, 25, 25.

And that way, markets will understand that's all you're going to do on the year. If he does it in September, then he'll be able to explain the whole logic of the policy pivot at his Jackson Hole remarks in August when the whole world is watching. Makes a lot of sense. September, however, is peak political politicking. It's really tough for the Fed to insert itself in that conversation.