Federal Reserve Chair Jerome Powell will tell lawmakers Tuesday that the Omicron variant of the coronavirus could slow the recovery in the U.S. job market and prolong supply chain disruptions that have fueled price spikes.
Powell said in testimony prepared for a Senate Banking Committee hearing that he still expects inflation to cool significantly next year, but he acknowledged that Omicron and other factors have led to more uncertainty about such forecasts.
“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,” he said in his statement.
The remarks by the Fed chief are his first on the state of the economy since the World Health Organization dubbed a new strain of the coronavirus as “a variant of concern,” though much remains unknown about Omicron. They also come just a week after President Joe Biden announced he would nominate Powell for a second term to lead the central bank.
Biden on Monday said he will release a detailed plan to fight the variant this week. The president said his administration will take action against the virus "not with shutdowns or lockdowns, but with more widespread vaccinations, boosters, testing and more."
The new variant has emerged as Fed officials are growing increasingly worried that higher inflation might be taking root, a prospect that may spur them to speed up their efforts to pull back support for the economy, according to minutes of the central bank’s policy meeting earlier this month.
The central bank raises borrowing costs to fight inflation, but higher rates can also hurt growth and job creation in an economy that is still recovering. For now, the Fed believes it’s more important to give the labor market continued support rather than trying to stop a problem — production and shipping delays — that might work itself out.
Still, Powell signaled that inflation was unlikely to drop back down to the Fed’s 2 percent goal in 2022. “It now appears that factors pushing inflation upward will linger well into next year,” he said. Inflation is now running at more than 6 percent.
“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,” he said. “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.”