Jerome Powell warns Omicron variant could dent economic recovery

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Federal Reserve Chairman Jerome Powell will tell a Senate committee Tuesday that the Omicron variant of the coronavirus could throw a wrench into US economic recovery efforts and hurt the country’s response to surging inflation.

“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 plans to tell Senate lawmakers on Tuesday, according to a copy of his prepared remarks.

“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.”

The comments will come as Powell testifies before the Senate Banking Committee, along with Treasury Secretary Janet Yellen. Both are required to brief lawmakers each quarter as part of the pandemic emergency stimulus measures that were passed in March 2020.

The remarks will come as the Omicron COVID variant stokes fresh concerns about the pandemic. The new variant was first detected in South Africa and has since been found in more than a dozen countries, and spurred travel restrictions in many parts of the world.

Federal Reserve Chairman Jerome Powell
Federal Reserve Chairman Jerome Powell is expected to tell the Senate Banking Committee that the new Omicron variant could potentially damage the recovery of the US economy.
EPA
patient getting vaccinated
The World Health Organization has said the Omicron variant is one of “deep concern” but also urged people to have patience while scientists attempt to understand the new strain.
AFP via Getty Images

The World Health Organization last week designated Omicron a “variant of concern,” though officials have urged patience as scientists find more out about it.

Moderna CEO Stephane Bancel told the Financial Times in an interview published Tuesday that he expects existing vaccines to be less effective against the new variant.

Bancel added that he doesn’t have the data on that yet, but speculated there could be a “material drop” in the current vaccines’ effectiveness against this variant.

Concerns over the new variant have thrown global stock markets into a frenzy as traders respond to every bit of fresh news as scientists improve their understanding of the new threat.

In his prepared remarks for Tuesday, Powell also plans to stick to his view that inflation is being caused by “pandemic-related supply and demand imbalances,” as opposed to critics of his view who say inflation is being driven by devaluation of the dollar due to the massive amounts of stimulus money pumped into the economy during the pandemic.

“Supply chain problems have made it difficult for producers to meet strong demand, particularly for goods. Increases in energy prices and rents are also pushing inflation upward.”

Moderna CEO Stephane Bancel
Moderna CEO Stephane Bancel has speculated that the current COVID-19 vaccines will be less effective against this new strain.
Nancy Lane/The Boston Herald via AP, Pool

The Labor Department’s Consumer Price Index, which measures a basket of goods and services as well as energy and food costs, jumped 6.2 percent in October from a year earlier, the fastest pace in over 30 years.

“It is difficult to predict the persistence and effects of supply constraints, but it now appears that factors pushing inflation upward will linger well into next year,” Powell plans to tell senators Tuesday.

But even as inflation runs hot and the labor market sees significant progress, Powell will note that pockets of the country are still being hit hard by the economic pressures of the pandemic.

Dow Jones Industrial Average chart
Global stock markets were reeling once again Tuesday morning due to fears surrounding the spread of COVID-19’s Omicron variant.

“In particular, despite progress, joblessness continues to fall disproportionately on African Americans and Hispanics,” he’ll say, according to the copy of his remarks.

Many Republicans and investors have urged Powell to raise interest rates from zero percent sooner rather than later, charging that the low rates are exacerbating inflationary pressures.

But the emergence of the Omicron variant has some investors pushing out their forecasts toward the end of next year for when the Fed might actually hike rates.

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