The rise of Omicron adds inflation uncertainty, according to the Federal Reserve’s chair.
According to Jerome Powell, rising Covid rates, along with the new type, represent additional threats to the US economy.
Mr Powell has previously referred to recent high inflation rates as “transitory,” a phrase he says should now be “retired.”
He also believes the Fed should consider reducing its bond-buying stimulus sooner rather than later.
During the pandemic, the Federal Reserve was commended for its asset-purchasing program, which helped to stave off recession. It started withdrawing that assistance this month, the first step toward raising borrowing costs, which is the traditional policy tactic for taming inflation.
However, there is a disagreement as to whether the support should be removed more quickly.
Some economists think that faster tapering and a speedier transition to higher interest rates are required to combat price increases that are at their quickest in 30 years.
Higher costs, according to Mr Powell, are the outcome of pandemic disruption, including supply chain disruption and changes in consumer demand. As the virus subsided, he expected that inflation would disappear.
The rise of Omicron, on the other hand, has shook global markets, increasing the possibility of increased limitations on travel, social, and economic activities.
Mr Powell told the Senate Banking Committee that “the recent surge in Covid-19 cases and the introduction of the Omicron variation offer adverse risks to employment and economic activity, as well as increasing inflation uncertainty.”
“More fear of the virus might diminish people’s desire to work in person, slowing labor market improvement and exacerbating supply-chain problems,” he noted.
“It is perhaps a good time to retire that phrase, and clarify more clearly what we mean,” Mr Powell said when asked if inflation could still be classified as transitory.
He believes strong inflation will continue until the middle of next year, thus the central bank would “likely” propose speeding up the reduction of its asset-buying program.
The words were seen by the markets as a shift in tone from the Federal Reserve chair, implying a move toward tighter monetary policy.
BMO Capital Markets’ Ian Lyngen stated, “We’ve always held that the Fed is the final owner of the ‘transitory’ characterization, and the chair’s willingness to move beyond that is a highly hawkish step.”