As Jerome Powell faces pressure from Democrats to keep interest rates low for the sake of the labor market, the Federal Reserve chair is reverting to a familiar central bank defense: High inflation hurts workers, too. Powell led a dramatic shift in the Fed’s monetary policy strategy last year — officials would no longer preemptively raise short-term rates to ward off inflation, but would wait until the labor market had achieved “broad-based and inclusive” maximum employment. But they didn’t bet on the pandemic. With inflation running near four-decade highs, and rapid progress in the labor market — maximum employment is fast approaching or may be already here, Powell said at his confirmation hearing Tuesday — the Fed has signaled it could soon begin lifting short-term interest rates. Senate Democrats raised concerns about what tighter monetary policy would mean for hiring and wages. But Powell offered this blunt assessment of the trade-offs of waiting too long: “If these high levels of inflation get entrenched in our economy and in people’s thinking, that will inevitably lead to much tighter monetary policy from us, and it could lead to a recession,” he said. “And that would be bad for workers.” “So really, achievement of maximum employment, by which we really mean continued progress in hiring and participation, is going to require price stability,” he added. Sound familiar? It tracks closely with what then-Fed Chair Janet Yellen said as the central bank was embarking on slow and steady rate increases for the first time since the financial crisis. Here’s Yellen in September 2016, discussing “risks in waiting too long to remove accommodation”: “One is the risk that the economy runs too hot … that we need to tighten policy in a less gradual way than would be ideal, and in the course of doing that — because that is a very difficult thing to accomplish, to gently create a bit more slack in the labor market — we could cause a recession in the process.” “And so that’s something my colleagues and I certainly wouldn’t want to be responsible for. We would all like to have a very long expansion, with the labor market operating well for many years to come.” And then-Fed Chair Alan Greenspan in March 1997: “We believe that a necessary condition for sustained economic growth, which is the maximum that can be achieved, is low inflation or price stability. It’s our judgment, based on ample historical evidence, that when inflation begins to accelerate within a very short period of time, economic expansion runs into trouble and the unemployment rate rises. “So we do not distinguish the goal of maximum sustainable economic growth from low inflation, because we believe the evidence is increasingly becoming persuasive that one is a necessary condition of the other,” he said. The argument has been a relatively standard one for Fed officials over the years, said David Wessel, director of the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy. For months last year, Powell had argued that the Fed could be patient as it waited for price pressures to ease and more workers to return to the labor force. His comments Tuesday underscore how dramatically officials have shifted their views over the past two months. “In a way this is a return to a more conventional approach, dictated by the circumstances,” Wessel said of Powell’s argument. “It was really easy to say, ‘We’re going to focus largely on the employment mandate because inflation isn’t going anywhere.’ Suddenly, inflation’s going somewhere.” But it’s not likely to appease Democrats, even if they generally do support Powell’s nomination. After the hearing, Senate Banking Chair Sherrod Brown (D-Ohio) tweeted this excerpt from from his opening statement: “Let's cut through the economists' lingo––when people talk about ‘cooling off’ the economy, what they really mean is making it harder for people to find jobs and stopping paychecks from growing.” IT’S WEDNESDAY — Good news for inflation expectations? Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., says Google searches of the word “hyperinflation” have collapsed. (But searches for “wordle” have taken off in the New Year!) What should we be searching for? Send us your best tips, ideas or word games at kdavidson@politico.com and aweaver@politico.com, or DM us on Twitter @katedavidson or @aubreeeweaver. | 
