The new version of the Covid-19 omicron could slow the recovery of the US economy and labor market, as well as increase inflation uncertainty, Jerome Powell, head of the US Federal Reserve’s Federal Reserve System (FRS), warned on Monday.
Powell has consistently said that the current rise in US inflation will be temporary, but acknowledged that the factors contributing to the rise in US prices will continue next year.
Powell’s testimony to the Senate Banking Committee on Tuesday points to his growing concern about this year’s rise in prices, which is exacerbating pressure on the FRS to raise interest rates faster.
In the early days of the Covid-19 pandemic, the FRS cut interest rates to zero and injected liquidity into the financial system, which, together with strong US government assistance, helped avert a more devastating economic situation.
Although the U.S. economy has “continued to strengthen,” its recovery has been slowed by the onset of the pandemic, beginning with the spread of the delta in the summer, Powell said.
The latest strain of omicron, first found in South Africa, has shocked global economic and health officials as to whether the strain is more contagious and serious and whether current Covid-19 vaccines will be effective against it.
“The recent rise in the number of Covid-19 cases and the emergence of the omicron variant pose risks to employment and economic activity and have increased inflationary uncertainty,” said Powell.
“Greater concern about the virus could reduce people’s willingness to work full-time, which would slow down progress in the labor market and exacerbate supply chain disruptions.”