AdvertisementOmicron Increases Inflation Uncertainty, Fed Chair Will Tell Lawmakers

Omicron Increases Inflation Uncertainty, Fed Chair Will Tell Lawmakers

Jerome H. Powell, Federal Reserve Chairman, will tell lawmakers on Tuesday that inflation is likely to continue long into next year and that Omicron’s new coronavirus variant is creating more uncertainty about the economic outlook, according to a transcript of his prepared remarks. .

The comments by Powell, who will testify before the Senate Banking Committee alongside Treasury Secretary Janet Yellen, convey a sense of caution at a time when price increases have been running at their fastest pace in three decades.

“It is difficult to predict the persistence and effects of supply constraints, but it now appears that the factors driving inflation higher will continue into the year ahead,” Powell plans to say. “In addition, with the rapid improvement in the labor market, the recession is waning, and wages are rising at a rapid pace.”

Mr. Powell will also touch on the new format that governments and scientists are racing to assess and contain.

“The recent rise in Covid-19 cases and the emergence of the Omicron variant poses downside risks to employment and economic activity and increases inflation uncertainty,” Powell said. “Bigger concerns about the virus could reduce people’s desire to work themselves, which would slow progress in the labor market and increase supply chain disruptions.”

Little is known about the new coronavirus boom, but it does represent something Federal Reserve officials worry about: the potential for the outbreak to continue, shutting factories, disrupting supply lines and keeping the economy out of balance. If that happens, as happened with the delta variant earlier in the summer and fall, it could keep prices higher.

Inflation picked up in 2021 as strong consumer demand hit the limited supply barrier. Closing production lines, backlogs of ports, and shortages of some parts prevented merchandise from reaching shelves and customers, prompting companies to charge more. At the same time, labor scarcity in some industries due to wariness of the virus and lack of childcare linked to the pandemic has led to higher wages and prices for some services.

It’s too soon to know if the new virus strain will contribute to these trends, making inflation last longer than it would otherwise. But the new boom comes at a delicate moment for monetary policy.

Central bankers are slowing their bond-buying program, a move that would give them more flexibility to raise interest rates – their traditional and most powerful tool for fueling the economy – if they are to do so next year.

Several Fed officials have indicated that they may accelerate the so-called “taper” of bond buying given how high inflation is and how intractable it is. Many economists think officials may announce a plan to do so at their December meeting.

But if the coronavirus hits the economy again, such a decision — and the timing and pace of the final rate increase — could make it more difficult.

That’s because the Federal Reserve balances two goals, controlling inflation and fueling employment, when it sets its policy. Removing aid to the economy faster and more fully may slow price gains by weighing down demand, but it will likely slow business and employment expansions in the process.

“We will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched,” Mr. Powell plans to say, after acknowledging once again that the Fed recognizes that “high inflation imposes significant burdens, especially on those least able to meet the high costs of necessities. such as food, housing, and transportation.”

Mr. Powell, whom President Biden plans to reappoint for a second term as Fed chair, will tell lawmakers that the Fed is “committed to the goal of price stability.”

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