Federal Reserve Chairman Jerome Powell will testify that the omicron variant of COVID-19 could end up harming the economy and worsening inflation.
Powell, who was just recently renominated by President Joe Biden to remain at the helm of the central bank, will testify alongside Secretary of the Treasury Janet Yellen on Tuesday before the Senate Banking Committee, where he will be asked questions about the new omicron variant in addition to other queries.
“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 said in prepared remarks for Tuesday’s testimony. “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.”
The newest COVID-19 variant has the potential to worsen the country’s inflation and supply chain problems, although it all depends on how much worse omicron turns out to be than other strains.
BIDEN VOWS TO FIGHT OMICRON SURGE WITH MASKS AND SHOTS, NOT LOCKDOWNS
Markets plunged by the largest amount of 2021 on Friday after investors were spooked by omicron, which the World Health Organization has labeled a “variant of concern.” Several countries have confirmed cases of the new variant, which is believed to have first emerged in southern Africa.
Biden decided to block off travel from several African countries out of fear that omicron could be deadlier or more resistant to vaccinations than previous strains, although experts believe it could take days or weeks to determine just how much of a threat it poses to the country.
Powell and Yellen will seek to avoid another situation like that of the delta variant, a strain that slowed this year’s economic growth and further exacerbated inflation, which has run well ahead of the Fed’s target.
Mark Hamrick, senior economic analyst at Bankrate, told the Washington Examiner that the single biggest unanswered question is whether vaccines provide sufficient protection against omicron.
He said that, barring a big surprise, he doesn’t think the variant is likely to cause major economic disruptions, although he warned it could cause economic problems if it turns out to be an outlier among the variants.
“The worst-case scenario would be that the efficacy of the vaccine, with respect to the variant, is lower than previous strains, and under those circumstances, I would fear that those who are vaccinated would then develop a fear or concern about the resumption of activities that has largely already been taking place,” Hamrick said.
If the virus scares people enough, causing the public to stay at home and not spend money at stores and theaters, for example, economic growth would almost certainly slow.
The variant’s possible effects on inflation are more complicated. Inflation clocked in at 6.2% for the year ending in October, the highest level in three decades.
Current inflationary pressures are caused by a litany of factors, but the combination of soaring domestic demand for goods and a lack of supply caused by supply chain snarls has caused prices for goods to soar. On the one hand, if demand declines because of people fearing to go out and spend money, there would be more supply of goods available, which would send prices down. On the other hand, supply chain problems are causing the scarcity of goods, and those supply chain backlogs are a direct result of COVID-19 restrictions and disruptions stemming from the pandemic. If omicron turns out to be much worse, it could further restrict supply and thus increase inflationary pressure on the economy.
“If there were an impact that would further disrupt the flow of goods, whether it’s manufacturing or transportation, then clearly that would risk either a sustained or further heightened bout of higher prices,” Hamrick said, although he emphasized that it is far too early to make a prediction on the matter.
David Sacco, a practitioner in residence at the University of New Haven finance department, downplayed concerns that the new strain will wreak havoc on the economy. He said that after nearly a year and a half of grappling with the coronavirus, the country has a sort of “COVID playbook.”
“I think we now have an economic game plan where we’re not going to go back to doing lockdowns because we’ve proven that we can manage COVID using vaccinations, and now treatments, and just some of the policies that we’ve engaged in over the last 18 months that have effectively demonstrated that we don’t need to lock down the economy,” he said on Monday.
Tom Miller, a senior fellow at the American Enterprise Institute, said it will likely be weeks until there is a clear-cut understanding of omicron but pointed out that, in the worst case, uncertainty and fear of the virus could not only cause further supply chain issues but also exacerbate changes in the labor-force structure.
“Right now we’re short of workers. We’ll be even more short of workers if they become more afraid of going out,” he told the Washington Examiner.
About 4.4 million people quit their jobs in September, slightly higher than another record the month before. The number of people leaving their jobs is the highest since the United States began keeping records about two decades ago and is equivalent to about 3% of the country’s labor force.
Worker shortages have caused companies to increase wages and bonuses to attract talent, and those higher costs have been translated to higher prices of their products in some cases — another inflationary pressure.
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Biden delivered remarks about the new variant on Tuesday. He said that masks and vaccines will be key to battling omicron, not lockdowns.
“We’re learning more about this new variant every single day. And as we learn more, we’re gonna share that information with the American people,” the president said. “I know you’re tired of me saying this, the best protection against this new variant or any of the variants out there, ones we’ve been dealing with already, is getting fully vaccinated and getting a booster shot.”
