Powell Warns Omicron Could Slow Labor Market Progress, Intensify Supply-Chain Disruptions
With the Omicron variant of the coronavirus making headlines, Federal Reserve Chair Jerome Powell is set to appear before the Senate Banking Committee on Tuesday to discuss the pandemic and the CARES Act.
In prepared remarks, Powell said the recent surge in new 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,” Powell said.
The potential for the intensification of supply-chain disruptions comes as Powell noted 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,” Powell said. “Increases in energy prices and rents are also pushing inflation upward.”
He added, “As a result, overall inflation is running well above our 2 percent longer-run goal, with the price index for personal consumption expenditures up 5 percent over the 12 months ending in October.”
Powell noted most forecasters, including at the Fed, expect inflation to slow significantly as supply and demand imbalances abate but predicted the factors pushing prices higher will linger well into next year.
“We understand that high inflation imposes significant burdens, especially on those less able to meet the higher costs of essentials like food, housing, and transportation,” Powell said.
He added, “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.”
Powell will also tell the committee increases in Delta variant cases contributed to slower economic growth this past summer, but a post-September decline in cases corresponded to a pickup in growth.
“Gross domestic product appears on track to grow about 5 percent in 2021, the fastest pace in many years,” Powell said in prepared remarks.
Meanwhile, President Joe Biden recently announced his intent to nominate Powell for a second term as Federal Reserve Chair.
The White House also revealed that Biden intends to nominate current Fed Governor Lael Brainard as Vice Chair of the Federal Reserve System.
In early November, the Fed announced plans to begin reducing its $120 billion in monthly bond purchases by $15 billion per month, citing the substantial further progress the economy has made toward its goals of maximum employment and price stability.
During his testimony, Powell suggested the Fed will discuss accelerating the pace at which it reduces its asset purchases during the next monetary policy meeting scheduled for December 14-15.
“At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases … perhaps a few months sooner,” Powell said.
Powell also indicated the Fed should retire the word “transitory” when referring to inflation, noting the central bank views it as meaning not leaving a lasting mark on the economy rather than short-lived.
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