Fed chief to tell lawmakers Omicron boosts inflation

Federal Reserve Chairman Jerome H. Powell will tell lawmakers on Tuesday that inflation will likely continue into next year and that the new Omicron variant of the coronavirus is creating more uncertainty around the economic outlook than a copy of his prepared remarks. .

Mr. Powell’s words, which will testify before the Senate Banking Committee with Treasury Secretary Janet Yellen, evoke a sense of caution at a time when price increases continue at a rapid pace. their fastest pace within three decades.

“The persistence and effects of supply constraints are difficult to predict, but now it seems that the factors pushing inflation upwards will linger until next year,” Powell plans to say. “Moreover, with the rapid recovery in the labor market, the recession is easing and wages are rising rapidly.”

Mr. Powell will also discuss the new variant, which governments and scientists are racing to evaluate and control.

“The recent rise in COVID-19 cases and the emergence of the Omicron variant adds to the downside risks to employment and economic activity and uncertainty for inflation,” Powell said. “More concern about the virus may reduce people’s willingness to work in person, which can slow labor market progress and intensify supply chain disruptions.”

Not much is known about the new mutation of the coronavirus, but it represents something Fed officials are concerned about: the possibility of the pandemic continuing to flare up, factories closing, supply lines collapsing and the economy spinning out of balance. If this happens as with the Delta variant early this summer and fall, it could sustain high prices.

Inflation soared in 2021 as strong consumer demand hit the limited supply barrier. Production line closures, port backlogs and shortages of parts prevented products from reaching shelves and customers, prompting companies to charge more. At the same time, labor shortages in certain industries caused by virus containment and pandemic-related childcare shortages are driving up wages and prices for some services.

It is too early to know if the new strain of virus will contribute to these trends and whether inflation will outlast it would otherwise. But the new mutation comes at a sensitive moment for monetary policy.

central bankers slowing down the bond-buying programA move that would give them more flexibility to raise interest rates, a more traditional and powerful tool to stimulate the economy, if doing so will be necessary next year.

A few Fed officials have signaled that they could accelerate so-called bond-buying “reductions” given how high and how stubborn inflation has proven to be. Many economists think that officials will be able to announce such a plan at their meeting in December.

But if the coronavirus hits the economy again, such a decision – and the timing and pace of eventual rate hikes – may prove more challenging.

This is because the Fed balances two objectives, controlling inflation and stimulating employment, when setting its policy. A faster and more complete removal of aid to the economy could reduce demand, slowing price increases, but will likely slow job expansion and hiring in the process.

After Powell said, “We will use our tools to support both the economy and a strong labor market and prevent higher inflation from settling in,” Powell plans to reaffirm that the Fed has acknowledged that “high inflation in particular places significant burdens on the economy.” those who cannot meet higher basic needs such as food, shelter and transportation.”

Mr. Powell, who President Biden plans to reappoint Fed chair for second termwill tell lawmakers the Fed is “committed to our price stability goal.”

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