Federal Reserve chairman Jerome Powell shifted his tone on inflation Tuesday, warning in remarks before the Senate that the new omicron variant could lead to higher prices well into next year and further complicate America’s economic recovery.
“The threat of persistently higher inflation has grown” due to the emergence of the Omicron variant, Powell admitted in remarks before the Senate Banking Committee, with the Federal Reserve now seeing suring prices lingering “well into next year.”
Omicron further poses “downside risks to employment and economic activity,” not to mention the “increased uncertainty for inflation,” Powell added.
The stock market hit session lows immediately following Powell’s comments, with the Dow plunging over 500 points, or 1.4%.
Though the economy and labor market continue to improve, greater concerns about the virus and a further rise in cases would hamper progress and “intensify” supply-chain disruptions, the Fed chair warned.
While Powell has in the past often repeated his mantra that higher inflation is “transitory,” he notably left that word out of his remarks on Tuesday—marking a shift in tone from the head of the central bank.
The Fed chair also noted that the central bank would discuss speeding up the tapering of its pandemic bond-buying program—despite the omicron threat—at an upcoming meeting in December.
“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 said. The Federal Reserve still forecasts inflation to moderate eventually, with rates expected to move closer to the central bank’s long-term 2% target by the second half of next year.
What To Watch For:
Inflation is at a 31-year-high, with October’s consumer price index surging 6.2% from last year, according to the latest data. Most Wall Street experts predict that although economic growth should remain solid, higher inflation is here to stay.
Investors are now increasingly betting that the Fed will have to raise interest rates in early 2021—just over a third predict a rate hike by May, according to CME Group’s FedWatch tool.
Powell’s comments come after President Joe Biden said in a press conference Monday that “there’s no need for lockdowns” in response to the new Covid variant. The World Health Organization labeled the omicron strain—first reported in South Africa and now emerging in other countries around the world—as a “variant of concern” last Friday. While most health experts have been cautious in predicting how dangerous it will be, several vaccine makers including Moderna and Regeneron have already warned that existing treatments won’t be as effective against omicron.
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