Programming Note: We’ll be off this Monday for Presidents Day but will be back in your inboxes on Tuesday, Feb. 22. 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. Minutes from the Federal Reserve’s January meeting told us little we didn’t already learn from Chair Jay Powell’s press conference last month. But they did offer clues about one concern that’s been overshadowed by elevated inflation and by the debate over the size of rate increases: the risk of a Russian invasion of Ukraine. Geopolitical tensions came up four separate times in the minutes released Wednesday from the Jan. 25-26 meeting, and Russia was mentioned explicitly twice. Fed staff pointed to rising geopolitical risks as factors behind a sharp drop in equity markets last month and movements in foreign asset prices. And Fed officials cited “the possibility of geopolitical turmoil that could cause increases in global energy prices or exacerbate global supply shortages” as a risk that could lead to higher inflation than they currently expect. And they flagged “the potential for escalating geopolitical tensions” as a risk to the economic outlook. While the threat of a Russian invasion in Ukraine has dominated headlines in recent weeks, it hasn’t figured prominently in the discussion about the path of U.S. monetary policy. That debate has focused on whether the Fed should raise rates by a half-percentage-point at its next meeting, as inflation data continue to point to a sizzling hot economy with widespread price pressures. San Francisco Fed President Mary Daly on Sunday pushed back on the need for a supersized increase and said it’s too early to predict how many rate hikes will be appropriate this year. “We have Ukraine right now, geopolitical risk,” she said on CBS’s Face the Nation. “We are just coming out of our homes after Omicron … We have another print before the March meeting on both the employment, the jobs report and inflation.” Geopolitical risks, Daly said, add to uncertainty Americans are already facing about the pandemic and the economy. “So this is just another factor, and uncertainty we know affects consumer sentiment and ultimately affects consumer demand.” Officials’ apparent concern about Russia-related risks has gone largely unnoticed, compared to the focus on the size of rate hikes and inflation worries, said Ellen Meade, a former senior Fed economist who worked on central bank communications. That those risks were mentioned several times in the minutes raises questions about whether, and to what extent, this is factoring into decisions about the appropriate size of a rate increase next month, she added. “It is an argument for 25 basis points in March,” Meade said, “and is likely to still be an argument for 25, even if some FOMC participants and some incoming data appear to point to 50.” If Russia invades Ukraine, it could push oil prices up 20 percent, to $110 a barrell, RSM US economists Joe Brusuelas and Tuan Nguyen said in a research note Wednesday. “Together with the spillover effect on natural gas prices, consumer confidence and uncertainty, the conflict would shave a little less than 1% from gross domestic product over the next year and cause inflation to rise by close to 2.8 percentage points to over 10%,” they estimated. Wage worries — The Fed minutes also reiterated that officials are keeping a close eye on wages as they assess whether inflation pressures are becoming entrenched, or leading to a spiral that pushes wages and in turn prices ever higher. Rising inflation is wiping out some of the biggest wage gains workers have seen in decades. Still, the Fed’s plans to tamp down price pressures has labor advocates and Democratic Party allies increasingly anxious that they’ll cut off the expansion before all workers have a chance to benefit, our Victoria Guida reports. While incomes grew rapidly last year, real wages, which are adjusted for inflation, dropped 1.9 percent for private-sector employees in 2021, according to the Labor Department. Victoria explains: “Because of that dynamic, it’s possible that the Fed could increase take-home pay while lowering the overall pace of wage growth, as long as inflation is reduced by a larger amount. “The job market itself is also strong, with worker shortages in some industries, raising the possibility that the Fed could dampen demand for labor without necessarily hurting those currently employed.” IT’S THURSDAY — Calling Nickelodeon fans! Don’t miss this sweet interview with Treasury Secretary Janet Yellen and Nick News correspondent Rory Hu. They talk about math, the Mint, the new Maya Angelou quarter and more. Have a tip, feedback or story idea this week? Let us know: kdavidson@politico.com, aweaver@politico.com, or on Twitter @katedavidson or @aubreeeweaver.
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