Federal Reserve Chair Jerome Powell testified before Congress on Wednesday morning, with inflation at the center of his remarks. Many on Wall Street are looking closely to see if Powell will drop hints about the central bank's next decision. The chairman suggested that the Fed may be hesitant to cut rates so soon, preferring to wait for more inflation data to arrive.

Morgan Stanley Chief Global Economist Seth Carpenter joins Yahoo Finance to discuss Powell's comments, the timing of rate cuts, and more.

The pushback of the Fed's first rate cuts reflects global tendencies in central banking, Carpenter explains: "I will call out my colleague Chetan Ahya who is our Chief Asian Economist. and has been pretty adamant a lot of Asian central bankers will be waiting for the Fed. They don't want to move in front of the Fed and they don't want to put at risk any exchange rate stability. I think, to a lesser degree, across the Atlantic, we've got the European Central Bank. We technically in our forecasts have them cutting before the Fed by a matter of weeks so I don't think that really counts and so one question that I get from clients all the time is well, suppose for whatever reason the Fed doesn't cut at all this year, does that mean the ECB can't cut at all? I don't think the answer is not at all. It just means probably less than would have been the case if the Fed followed through with all of the cuts."

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

JOSH LIPTON: Now for more on today's comments from Fed Chair Jerome Powell and what they mean for the markets, as well as the fight against inflation, let's welcome in Seth Carpenter, Morgan Stanley Chief Global Economist. Seth, always good to have you on the show.

SETH CARPENTER: Thanks for having me.

JOSH LIPTON: So listen, Jay Powell testifies. You know, we didn't expect him to rock the boat. He didn't. I mean, the economy is strong, he said. Labor market is strong. Inflation is moving in the right direction. I think he put it like, he wants to see a bit more good data, right? But what were your big takeaways? What did you learn?

SETH CARPENTER: No, I think exactly that. I think he is at a point where they can't be definitive. The recent data, in fact, if anything, had been stronger. And then we've expected, the market's expected, probably the Fed's expected. The trick is to figure out how much of this is a blip. If

We look back over the past two years, the labor market rate has been gently cooling a little bit. And then every so often, boom, a really big month of nonfarm payrolls. And then it goes back to the trend. That's presumably what Powell and company are assuming. That's what we're assuming is the takeaway. So we'll see Friday morning.

And so what he wanted to do I think was nothing, essentially leave things the way Julie was talking about with the market reaction to it, which is as little change as possible preserve optionality. I have to say right now the market pricing is very consistent with where we've been for a while, which is to say, first cut probably in June, total of about 100 basis points worth of cuts over the rest of the year. But there's got to be some uncertainty. We've got to see the data between now and then.

JULIE HYMAN: On a day like this when we see Powell before Congress, you, of course, get sort of two versions of America, right? You get the version that Ayanna Pressley, for example, brought up, where she said interest rates need to come down to make housing more affordable. And then you had Patrick McCarthy, who's the chair of the committee, saying don't make this political, don't bring down rates effectively, saying don't bring down rates before they need to be.

And it just leads me to think about sentiment in those sort of two visions of where we are economically. How do you think about where we are with inflation and what those views reflect?

SETH CARPENTER: It's a super difficult situation. We had a bout of inflation that is worse than just about anything we've seen. I'm in my early 50s. I don't look it, but I'm in my early 50s. And by the time-- since the time that I've been like a conscious adult making real decisions, we haven't seen inflation like this.

So I think in that regard, it's a big deal. And lots of people are worrying is this-- we're worrying for a while, is this a replay of the 1970s? The answer is clearly no at this point. We didn't think it was going to be. But people had to understand that.

On the other hand, the economy is strong. And that strength, if it continues unchecked, could mean that some of the residual inflation stays there forever. And so the Fed with a very blunt tool, interest rates, is trying to slow the economy enough that inflation is under control, but not so much that they cause a recession.

Well, the most interest sensitive parts of the economy are housing, consumer durables. And people really feel that. Anyone who has to borrow in order to buy things, which is a lot of people, really feel that pain. On the other hand, everybody knows that inflation is too high. Everybody has seen those prices going up. And so the Fed really is stuck between a rock and a hard place. And they're trying really hard to balance things.

JOSH LIPTON: And you think that the first cuts come in June. Does that exact timing actually matter, though?

SETH CARPENTER: No. I have to say as a macro economist, who has spent probably too much time working with statistics, there's lots of fuzziness always with these big picture data. I think right now with the market, anticipating some easing later in the year, probably some additional easing next year, that's about what matters. If it happens in June, if it happens in July, I don't think that's what's most important. What I think is important is the Fed continuing to communicate a reasonably coherent message. And that's where we are.

JULIE HYMAN: Does the push back of the Fed's first interest rate cut, does that affect what we see from central bankers around the globe in terms of their strategy?

SETH CARPENTER: I think it does and to varying degrees. So for example, I will call out my colleague, Chetan Ahya, who's our Chief Asia Economist and has been pretty adamant, a lot of Asian central bankers are going to be waiting for the Fed. They don't want to move in front of the Fed. They don't want to put at risk any exchange rate stability.

I think to a lesser degree across the Atlantic, we've got the European Central Bank. We technically, in our forecast, have them cutting before the Fed, but by a matter of weeks. So both of them at the June meeting, so I don't think that really counts.

And so one question that I get from clients all the time is, well, suppose for whatever reason the Fed doesn't cut at all this year, does that mean the ECB can't cut at all? And I don't think the answer is not at all. It just means probably less than would have been the case if the Fed followed through with all those cuts.

Central banks have to worry about those interest rates differentials. They feed through to exchange rates, which then feed through to their domestic inflation. So it matters. It's not the whole story, but it's got to be one of the components.

JOSH LIPTON: And Seth, I get you here on this. ADP report this morning is $140,000, a bit less than expected, but it's still strong. What are you looking for on Friday to get the big government report?

SETH CARPENTER: Absolutely. Like I said, the last jobs report was super strong. We think that was something of an anomaly. And we're looking for a bit of a reversion. So 160,000 on private payrolls, about 205,000 on total, so that obviously the difference is government employment. I think it's important to remember every cycle, it's the case that government employment be it federal or state and local sort of lags the rest of the cycle. And so we're seeing bigger contributions from that part. But for private payrolls, we're looking for things to settle back down about 160,000.