Editor’s Note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our s each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Federal Reserve Chair Jerome Powell on Wednesday delivered the news everyone was expecting — a rate increase is likely in March— and put the exclamation point on the Fed’s lightning-fast pivot toward tighter monetary policy. He emphasized the risks of inflation while downplaying labor-market concerns that were front of mind for policymakers just a few months ago. “I think there’s quite a bit of room to raise interest rates without threatening the labor market,” he said, sending markets swooning. It was just one of several surprisingly frank moments from Powell, who managed to strike a hawkish tone while emphasizing that it’s nearly impossible to say with any confidence what the path of policy will be this year given how uncertain the economic outlook is. A few takeaways — Powell was candid … Powell is known for his straightforward, plainspoken manner. But he surprised even some longtime Fed watchers at his press conference with his blunt assessment of the labor market (at maximum employment), inflation risks (they’ve gotten worse) and financial conditions (not overly worrisome). “I found him to be more hawkish than I would have expected given the type of volatility we’ve seen in markets recently and given the fact that there’s still a number of unknowns in terms of economic data,” said Greg Daco, chief economist at EY Parthenon. … But also adroit At the same, Powell repeatedly stressed that the Fed must remain nimble and respond to the data as it comes in. And neither the statement nor Powell offered many details about the pace of policy tightening. He was asked, for example, about whether the Fed may raise rates by a half-percentage-point at once or raise rates at consecutive meetings. He didn’t take either option off the table, and instead responded with a list of reasons why the current economic situation is very different from any previous tightening cycle. “They’ve really, I thought, methodically prevented themselves from getting into any kind of box caused by market expectations that they would proceed at any particular pace,” said Bill Nelson, chief economist at the Bank Policy Institute and a former senior Fed official. “I thought that that was very well done.” Maximum employment: Now and Later Powell has emphasized in recent months that stable prices — in essence, tighter monetary policy now — will be essential to see further gains in the labor market over a longer expansion. But are we at maximum employment? our Victoria Guida asked. Powell made a distinction between maximum employment now, and maximum employment over the longer term, suggesting that we may have reached the former, but the latter could be even higher. “I would say that most FOMC participants agree that labor market conditions are consistent with maximum employment, in the sense of the highest level of employment that is consistent with price stability — and that is my personal view.” But he continued: “In the particular situation we’re in now, the level of maximum employment that’s consistent with stable prices may increase, and we hope that it will as more people come back in the labor market, as participation gradually rises. And the policy path that we’re broadly contemplating would be supportive of that outcome as well.” What’s with the fiscal drag? Powell rattled off a handful of reasons why inflation pressures may ease on their own this year, including much less support from fiscal policy. It’s an argument the White House, and Powell’s colleague Lael Brainard, have been flagging since last summer: As pandemic aid programs recede, fiscal policy will pose a headwind to growth and help keep inflation in check. Some economists aren’t convinced we’ll see much of a drag. “We know that a lot of the stimulus that went out the door last year was saved,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. “We know that state and local governments, because their own finances were better than anticipated, have built up a couple hundred billion dollars they haven’t spent.” “That war chest should help smooth out those fiscal impulse measures over this year,” he added. Watching wage growth Powell again mentioned very strong wage growth as something policy makers are carefully monitoring as they assess whether elevated inflation is becoming entrenched, and consider the path of future rate increases. At the December meeting, Powell flagged a surprising wage jump in the employment cost index as one factor that led to the Fed’s hawkish pivot. The latest ECI report is due out Friday. “The question will be how the Fed interprets signs that indeed wage growth has broadened, that it has firmed and that it’s showing more signs of persistence,” Daco said. “That I think is going to be the key guide for Fed policy in 2022.” IT’S THURSDAY — You thought we were over the hump? Buckle up, we’ll get our first read of fourth-quarter GDP today. Have ideas, tips or suggestions for MM? Send them our way: kdavidson@politico.com, aweaver@politico.com, or on Twitter @katedavidson or @aubreeeweaver.
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