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. Programming Note: We’ll be off this Monday for Juneteenth but will be back in your inboxes on Tuesday. Federal Reserve Chair Jerome Powell had a rare gaffe shortly after announcing that the central bank would hold rates steady for the first time in more than a year. The Fed’s decision to stand pat at its meeting this week provides “the economy a little more time to adapt as we make our decisions moving forward,” Powell said. “We’re trying to get this right.” “The skip — I shouldn’t call it a skip — the decision makes sense,” he added. “Skip” could wind up being the more accurate description. Markets had anticipated a “hawkish pause,” but the Fed’s warning that as many as two more rate hikes could be in store for 2023 — and that cuts certainly aren’t imminent — caught many flat-footed. Despite signs of cooling inflation and some softening in the labor market, prices are much, much higher than Powell & Co. would like. Stocks briefly cratered shortly after the Fed officials forecasted that overall PCE inflation (including food and energy) wouldn’t drop to the central bank’s 2 percent target until 2025. “There is a path to getting inflation back down to 2 percent without having to see the kind of sharp downturn and large losses of employment that we’ve seen in so many past instances. It’s possible. In a way, a strong labor market that gradually cools could aid that along,” he said, according to our Victoria Guida. Still: “The committee is completely unified in the need to get inflation down to 2 percent and will do whatever it takes to get it down to 2 percent over time.” In other words, even if higher borrowing costs push the economy into a recession, those dangers are much less severe than what would occur if inflation became entrenched. “History teaches you that, often, it's hard to kill inflation on that first pass,” said Darrell Cronk, the chief investment officer of Wells Fargo's wealth and investment management division, told reporters shortly before Powell’s press conference. While Cronk’s team doesn’t expect inflation to rebound anytime soon, they’re watching the energy and housing sectors for signs it could come back. If that happens, it’s “likely a 2024, 2025 story,” he added. To state the obvious, if inflation does rebound in 2024, it wouldn’t bode well for President Joe Biden’s reelection. Democrats are starting to buy the hype that the president’s stewardship of the economy could be a winning message in next year’s election, Punchbowl’s Brendan Pedersen wrote on Wednesday. That’s been a tough sell even with a solid labor market and cooling inflation. It gets a lot harder if the Fed doesn’t pull off a soft landing. Economic trackers around manufacturing have been slowing for months, Cronk said, and “you could argue – in many facets — that the U.S. economy is already in recession.” And if that’s the case, another two rate hikes would really sting. IT’S THURSDAY — Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.
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