The emergence of the Omicron variant of SARS-CoV-2 could slow the US economy and hiring, while also raising uncertainty about inflation, US Federal Reserve Chairman Jerome Powell said on Monday in prepared remarks delivered to the US Senate Committee on Banking, Housing and Urban Affairs yesterday.
An increase in infections caused by the Delta variant of SARS-CoV-2 and the emergence of the Omicron variant “pose downside risks to employment and economic activity, and increased uncertainty for inflation,” Powell said.
The Omicron variant could also worsen supply-chain disruptions, he added.
Photo: AP
Powell’s comments come after other Fed officials said that the central bank should consider winding down its ultra-low interest rate policies more quickly than it plans. They cited concerns about inflation, which has jumped to a three-decade high.
At their last meeting on Nov. 2 and 3, Fed policymakers agreed to start reducing the central bank’s US$120 billion in monthly bond purchases by US$15 billion per month.
The Fed has pegged its short-term interest rate at nearly zero since March last year, when COVID-19 began to spread.
Yet Powell’s remarks suggest that the additional uncertainty raised by the Omicron variant might 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.
Little is known definitively about the health effects of the Omicron variant. If Americans pull back on spending and the US economy slows, that could ease inflationary pressure in the coming months.
However, if the new variant causes another wave of factory shutdowns in China, Vietnam or other Asian countries, that could worsen supply-chain congestion, particularly if Americans keep buying more furniture, appliances and other goods.
That, in turn, could push prices even higher in the coming months.
Separately, the Omicron variant could hurt global growth prospects, while also pushing prices higher, rating agencies Fitch Ratings and Moody’s Investors Service said on Monday.
“The Omicron variant poses risks to global growth and inflation, especially as it comes during a period of already stretched supply chains, elevated inflation and labor market shortages,” Moody’s associate managing director Elena Duggar said in e-mailed comments.
The variant is also likely to hit demand during the upcoming holiday travel and spending season, Duggar added.
“If the new variant affects global market risk appetite, it would cause further financial stress for debt issuers with large financing needs. For example, emerging market countries that rely on international market borrowing may face heightened refinancing risks,” she said.
Separately, Fitch Ratings said that it could not incorporate the effects of the Omicron variant into its economic growth forecasts until more is known about its transmissibility and severity.
“We currently believe that another large, synchronized global downturn, such as that seen in the first half of 2020, is highly unlikely, but the rise in inflation will complicate macroeconomic responses if the new variant takes hold,” Fitch said.
Additional reporting by Reuters
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