Powell Warns of Economic Threats From Omicron Variant

Federal Reserve Board (FRB) Chair Jerome Powell has warned the U.S. Congress that the Omicron variant of COVID-19 could threaten the U.S. economic recovery. In prepared remarks that he delivered before the U.S. Senate Committee on Banking, Housing, and Urban Affairs on Nov. 30, 2021, Powell said that the Omicron variant could threaten the U.S. labor market and cloud the central bank's inflation forecast.

In his prepared testimony, Powell noted: "The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation. 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."

Key Takeaways

  • Fed Chair Jerome Powell warned Congress that the Omicron variant of COVID-19 poses serious economic risks.
  • These risks include reducing "people's willingness to work in person" while increasing "supply chain disruptions."
  • He reiterated the Fed's commitment to "price stability."
  • However, he indicated that inflation should remain elevated into 2022.

Powell Still Expects Inflation to Slow, but Not Yet

Regarding inflation, Powell had this to say in his prepared testimony: "Pandemic-related supply and demand imbalances have contributed to notable price increases in some areas. Supply chain problems have made it difficult for producers to meet strong demand, particularly for goods. Increases in energy prices and rents are also pushing inflation upward. As a result, overall inflation is running well above our 2% longer-run goal, with the price index for personal consumption expenditures up 5% over the 12 months ending in October."

Tip

The complex supply chains relied upon by many businesses and industries, often crossing national boundaries, have been disrupted by the labor shortages created by the COVID-19 pandemic.

Powell continued: "Most forecasters, including at the Fed, continue to expect that inflation will move down significantly over the next year as supply and demand imbalances abate. It is difficult to predict the persistence and effects of supply constraints, but it now appears that factors pushing inflation upward will linger well into next year. In addition, with the rapid improvement in the labor market, slack is diminishing, and wages are rising at a brisk pace."

Powell added this in his statement: "We are committed to our price stability goal. We will use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched."

In response to a question from Senator Sherrod Brown (D-OH), who chairs the Senate Banking Committee, Powell indicated that the sorts of supply bottlenecks that have been spurring price increases seem to have intensified in recent weeks. As a result, he warned that inflation may continue to rise in the short term.

Impact on Tapering

Some observers believe that, should the new Omicron variant prove to be a serious brake on economic activity, the Fed may slow its planned process of tapering, through which its monthly purchases of bonds will be reduced. However, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, has indicated that, should Omicron follow a pattern similar to that of previous COVID-19 variants, it may prove to be even less of a drag on economic activity than the Delta variant was during the summer of 2021.

Tapering is the process by which the Fed plans to reduce monthly bond purchases, which have kept interest rates at near-zero levels. Nonetheless, the Fed will retain a massive bond portfolio.

"We have a lot of momentum in the economy right now," Bostic said during an interview, citing strong jobs growth. He added, "And that momentum, I'm hopeful, will be able to carry us through this next wave, however it turns out."

As a result, Bostic believes that the program of tapering actually can be accelerated, and that the Fed may be able to increase interest rates once or twice in 2022. "We're not going to let inflation get out of control," Bostic said.

During the hearing, Senator Patrick Toomey (R-PA), ranking Republican member of the Senate Banking Committee, expressed concern that the Fed continues to pursue a highly expansionary monetary policy, even as inflation has continued to rise. Toomey observed that bond purchases remain high, even amid tapering. He asked Powell how long inflation must remain above the Fed's long term target of 2% before it is no longer considered to be "transitory." Powell did not offer a definite answer but reiterated his commitment to achieving price stability in the long run.

Article Sources
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  1. Board of Governors of the Federal Reserve System. "Coronavirus and CARES Act: Testimony by Chair Powell Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.," Accessed Nov. 30, 2021.

  2. U.S. Senate Committee on Banking, Housing, and Urban Affairs. "CARES Act Oversight of Treasury and the Federal Reserve: Building a Resilient Economy," Accessed Nov. 30, 2021.

  3. CNBC. "Fed’s Bostic Says He Remains Open to Faster Taper and One or Two Rate Hikes in 2022." Accessed Nov. 30, 2021.

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