U.S. Economic Recovery Remains Strong But Omicron Variant Could Complicate It: Officials

Federal Reserve Chairman Jerome Powell said Tuesday that the Fed should know about the potential economic impact from the COVID-19 Omicron variant in time for its next meeting, but for now, it has not been factored into the economic outlook, the Associated Press reported.

"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," he said at a Senate Banking Committee hearing. "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."

If the Omicron variant leads to another wave of factory and port shutdowns and to more shutdowns and stay-at-home orders, Americans might keep spending heavily on goods, and therefore worsen supply bottlenecks and rising prices.

The COVID-19 variant could also renew fears of returning to work and becoming ill. More Americans may quit their jobs at a time when resignations are at record highs, and magnify the labor shortages.

Powell said the Federal Reserve will consider dialing back its ultra-low interest rate policies to counter the inflation he believes will likely persist well into 2022.

"The economy is very strong and inflationary pressures are high. It is therefore appropriate, in my view, to consider wrapping up the taper of our asset purchases...perhaps a few months sooner," Powell said.

For more reporting from the Associated Press, see below.

Federal Reserve Chairman Jerome Powell
Federal Reserve Chairman Jerome Powell said Tuesday that the Fed should know about the potential economic impact from the COVID-19 Omicron variant in time for its next meeting in mid-December. Above, Powell speaks during an event in the South Court Auditorium on the White House complex in Washington, D.C., on November 22, 2021. Susan Walsh/Associated Press

The Fed has begun reducing its monthly bond purchases, which are intended to lower longer-term borrowing costs, at a pace that would end those purchases in June. But Powell made clear that Fed officials will discuss paring those purchases more quickly when it next meets in mid-December.

Doing so would put the Fed on a path to begin raising its key short-term rate as early as the first half of next year. A higher Fed rate would, in turn, raise borrowing costs for mortgages, credit cards and some business loans.

Stock prices tumbled after Powell's comments, with the Dow Jones Industrial Average down about 1.5 percent in mid-day trading. Many investors had hoped that Powell would signal that the Fed would put off any policy changes until the impact of the omicron variant had become clearer. Instead, he suggested that the Fed has taken a decisive turn toward reducing its economic stimulus.

Under fire from some Senate Republicans about worsening consumer inflation, which reached a three-decade high last month, Powell acknowledged that price increases have been worse than the Fed expected and will last longer than the policymakers initially thought. As a result, he said, the term "transitory" no longer works as a description of inflation.

"It's probably a good time to retire that word and try to explain more clearly what we mean," 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.

Treasury Secretary Janet Yellen also testified before the Senate Banking panel and urged Congress to raise the nation's borrowing limit. Yellen has previously warned that without a hike in the debt ceiling, the U.S. government could default on its debt obligations for the first time soon after December 15.

"I cannot overstate how critical it is that Congress address this issue," Yellen said. "America must pay its bills on time and in full. If we do not, we will eviscerate our current recovery."

Congress is expected to address the borrowing limit and also faces a Friday deadline to provide enough funding to keep the federal government open.

Yellen also said that for now, the economic recovery "remains strong" but urged that Americans get vaccinated or receive booster shots to guard against the Omicron variant.

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 and 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 March of 2020, 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.