New omicron variant poses risks to the economy

121
2
New omicron variant poses risks to the economy

The emergence of the omicron variant poses downside risks to the economy and adds to uncertainty over inflation, said Jerome Powell, Chairman of the Fed on Monday.

Powell said that concerns about the virus could reduce people'willingness to work in person, which would slow progress in the labor market and cause supply-chain disruptions, as well as increase demand for work in person, which could lead to increased supply chain disruptions, which would lead to a shortage of workers in the labor market. The testimony was released early.

Fed watchers are divided over what the spread of omicron means for Fed policy.

The central bank's tapering of asset purchases is set to accelerate so that purchases could end in March, instead of June, until news of the variant was released last week.

Chris Low, chief economist at FHN Financial, said the Fed didn't react much at all to the delta variant.

Others think omicron will cause the Fed to take a patient approach.

If a clearer, and reasonably positive picture has not emerged by the time of the Dec. 14 -- 15 meeting, then the Fed is presumably going to delay the decision to tapering, said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note to clients.

The yield on the 10 year Treasury note TMUBMUSD 10 Y has fallen close to 1.5% from nearly 1.7% last week, after the new variant emerged.

The World Health Organization said the global risk from the new variant was very high.

Powell said that the Fed continues to expect that inflation will move down significantly over the next year as supply and demand imbalances abate.

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.

He stated that the labor market is improving rapidly, with wages rising at a brisk pace.

Matt Luzzetti, Chief U.S. economist at Deutsche Bank, thinks the Fed will double the monthly reduction in asset purchases to $30 billion from $15 billion per month. He also moved forward on the lifting of short-term interest rates from July to June.

Luzzetti said that if the key data points over the next two weeks disappoint materially, market turmoil does not subside, or negative news becomes evident on the virus front, we will revisit that expectation.