Rising Covid-19 cases and the new Omicron variant could imperil the economic recovery and exacerbate inflationary pressures, Federal Reserve chair Jay Powell is set to tell US lawmakers on Tuesday.
In testimony to be delivered at a joint congressional hearing with Janet Yellen, Treasury secretary, Powell will say 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 will say, according to prepared remarks released on Monday.
“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 will testify alongside Powell, will reiterate his warnings while encouraging people to get vaccinated, according to her prepared statement.
“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 will say. “What remains true is that our best protection against the virus is the vaccine. People should get vaccinated and boosted.”
Yellen will add 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.
Powell, who was recently appointed to a second term by President Joe Biden, and Yellen will 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’s statement 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 will 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 in the remarks released on Monday 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 will say. “We will use our tools both to support the economy and a strong labour market and to prevent higher inflation from becoming entrenched.”
Investors expect the Fed to raise interest rates twice next year, with the first adjustment pencilled in as early as the third quarter.
Treasuries advanced on the comments from Powell, with the yield on the two-year note — the most sensitive to monetary policy — declining 0.01 of a percentage point for the day to 0.48 per cent. It had traded with a yield of 0.51 per cent just before the prepared testimony was released.
Additional reporting by Eric Platt in New York