Editor's Note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers 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. WHEN ONE FED OFFICIAL MOVES THE MARKET — Does the Fed lead the markets, or do the markets lead the Fed? It's a question practically as old as the central bank. Here's a new one: If one Fed official helps lead markets in one direction, does the rest of the central bank's policy-setting committee have an obligation to follow? St. Louis Federal Reserve President James Bullard raised eyebrows Monday when he suggested that the Fed "has to follow through and ratify" market expectations of a half-percentage-point interest rate increase next month, or risk losing credibility. The eyebrow-raising part is that Bullard appears to be part of the reason market expectations for such a move have recently jumped to 90 percent. Inflation in January was higher than economists expected, the Labor Department said Thursday, prompting federal-funds futures markets to raise their bets for a half-percentage-point rate hike in March — something that hasn't happened since 2000. Those expectations climbed even higher Thursday afternoon, after Bullard first said he favored such a move. Other Fed officials, however, have signaled they are not necessarily sold on the idea. Asked on Monday about his market-moving comments, Bullard acknowledged that he's just one person on the Federal Open Market Committee and said he'd make his case when policymakers meet next month. Still, if the Fed doesn't do what the markets expect, Bullard told CNBC's Steve Liesman, "it makes it appear that we're not defending our 2 percent inflation target." We asked former Fed Vice Chair Don Kohn what he makes of this logic. First off, Kohn said, Bullard talks frequently but is often not at the center of the committee. Second, this is an instance where what he said "fell on fertile ground" — that is, markets were already contemplating this possibility, and he raised it further, Kohn said. Finally, thinking through how markets will react to a policy decision is often part of the discussion. "The people in favor of a particular policy that's built into markets always argue that not doing it would cost something," Kohn said. "I can remember a couple of those discussions — 'Markets have X built in, we need to do X or we'll disappoint.' But I think in the end, doing the right thing is what you need to do, and let the markets adjust." The Fed's credibility, he added, "will depend on achieving the objectives that Congress has given it. That's the key. And they've got to figure out how best to do that. Markets may anticipate them correctly, they may not." How best to do it? Kohn said the Fed has a number of options to continue shaping expectations and removing support for the economy, including through forward guidance about the path of policy — such as public remarks and the Fed's so-called dot plot — as well as decisions about the balance sheet. "The 50-basis-point increase is one option, but there are others, and they need to think about the combination of options that will best meet their needs," he said. Fed speak — Of course, it would help to hear from senior Fed officials themselves where they see policy heading. New York Fed President John Williams is scheduled to speak Friday, and Governor Lael Brainard is also set to discuss central bank digital currencies at an event Friday, though she could surely be asked about monetary policy. What about Powell? This is usually the time that Fed Chair Jerome Powell heads to Capitol Hill to deliver his semiannual monetary policy testimony. With Congress in recess next week and the Fed beginning its customary pre-meeting blackout period on March 5, we wouldn't be at all surprised to see the Senate Banking and House Financial Services committees announce hearings with Powell during the first week of March.
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