Omicron threatens US economic recovery, warns Powell

Rising Covid-19 cases and the new Omicron variant could imperil the economic recovery and exacerbate inflationary pressures, Federal Reserve chair Jay Powell told US lawmakers on Tuesday.

In testimony delivered at a joint congressional hearing with Janet Yellen, Treasury secretary, Powell said that while US consumer demand remains buoyant and workers are returning to the workforce, the possibility of coronavirus pandemic-related setbacks is clouding the economic outlook.

“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,” Powell said in prepared remarks.

“Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labour market and intensify supply-chain disruptions.”

Yellen, who testified alongside Powell, reiterated his warnings while encouraging people to get vaccinated.

“The progress of our economic recovery can’t be separated from our progress against the pandemic, and I know that we’re all following the news about the Omicron variant,” she said. “What remains true is that our best protection against the virus is the vaccine. People should get vaccinated and boosted.”

Yellen added that a failure by Congress to raise the debt limit could also “eviscerate” the economic recovery. According to the Treasury’s latest estimates, the government risks running out of cash after December 15.

Yellen and Powell, who was recently appointed to a second term by President Joe Biden, face the Senate banking committee at a tenuous moment for the US economy, which is grappling with the highest rates of inflation in roughly 30 years.

Price increases in certain areas have been “notable”, Powell stressed, with the factors pushing up inflation likely to linger “well into next year”. He still expects inflation to abate “significantly” over the next year, however, as supply and demand imbalances work themselves out.

Powell’s comments come amid a broader debate among senior central bank officials about how the Fed should manage the uncomfortably high inflation, which is persisting far longer than expected.

Richard Clarida, the outgoing vice-chair who will be replaced by governor Lael Brainard if she is confirmed by the Senate, opened the door this month to the Fed speeding up the pace of its taper, or reduction, of its $120bn asset purchase programme. The central bank began scaling back its bond-buying this month at a pace of $15bn each month, which suggests the stimulus will end in June.

That possibility was raised before the Omicron variant sparked global alarm, however, injecting greater uncertainty into the Fed’s policy path.

Powell vowed again on Tuesday that the Fed would act to tame inflation if necessary, acknowledging the costs posed by higher prices. Reducing inflation is also a crucial priority of the Biden administration, whose latest spending bill is facing considerable pushback from Republicans and even from some moderate Democrats.

“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. “We will use our tools both to support the economy and a strong labour market and to prevent higher inflation from becoming entrenched.”

Following the emergence of the Omicron variant, investors have scaled back their expectations about how aggressively the Fed will raise interest rates next year. Less than a week ago, traders had priced in three adjustments. Now, they anticipate two, with the first rate rise pencilled in for the third quarter.