Powell says COVID variant clouds inflation, economic outlook

Federal Reserve Chair Jerome Powell says that the appearance of a new COVID-19 variant could slow the economy and hiring, while also raising uncertainty about inflation.

The recent increase in delta cases and the emergence of the omicron variant “pose downside risks to employment and economic activity and increased uncertainty for inflation,” Powell said Monday in prepared remarks to be delivered to the Senate Banking Committee on Tuesday. The new variant could also worsen supply chain disruptions, he said.

Powell’s comments come after other Fed officials in recent weeks have said the central bank should consider winding down its ultra-low interest rate policies more quickly than it currently plans. They cited concerns about inflation, which has jumped to three-decade highs.

Yet Powell’s remarks suggest that the additional uncertainty raised by the omicron variant may complicate the Fed’s next steps.

“Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions,” Powell said.

While little is known definitively about the health effects of the omicron variant. If it were to cause Americans to pull back on spending and slow the economy, that could ease inflation pressures in the coming months.

Yet if the new variant causes another wave of factory shutdowns in China, Vietnam or other Asian countries, that could worsen supply chain snarls, particularly if Americans keep buying more furniture, appliances and other goods. That, in turn, could push prices even higher in the coming months.

Powell acknowledged that inflation “imposes significant burdens, especially on those less able to meet the higher costs of essentials like food, housing, and transportation.”

He said most economists expect inflation to subside over time, as supply constraints ease, but added that, “factors pushing inflation upward will linger well into next year.” At a news conference last month, Powell said high inflation could persist into late summer.

At their last meeting November 2-3, Fed policymakers agreed to start reducing the central bank’s $120 billion in monthly bond purchases by $15 billion a month. That would bring the purchases to an end in June.

Those bond buys, an emergency measure that began last year, are intended to hold down longer-term interest rates to encourage more borrowing and spending. The Fed has pegged its short-term interest rate, which influences other borrowing costs such as for mortgages and credit cards, at nearly zero since last March, when COVID-19 first erupted.

Last week, the Fed released minutes from the November meeting that showed some of the 17 Fed policymakers supported reducing the bond purchases more quickly, particularly if inflation worsens. That would give the Fed the opportunity to hike its benchmark rate as early as the first half of next year.

At that time, investors expected three rate hikes next year, but the odds of that many hikes have fallen sharply since the appearance of the new coronavirus variant.