Federal Reserve Chairman Jerome Powell warned Congress that while the Federal Reserve continues to expect inflation will move down "significantly" over the next year, it "now appears that factors pushing inflation upward will linger well into next year."
The new COVID-19 variant Omicron could have a negative impact on employment and inflation, Powell told Congress Tuesday in his prepared remarks.
"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. 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," Powell said. He was appearing at a hearing before the Senate Committee on Banking, Housing and Urban Affairs to testify about the economic recovery from the pandemic. Powell did later emphasize he does not think the effects on the economy will be remotely comparable to the COVID-19 shutdowns of last March.
The World Health Organization flagged Omicron as a COVID variant of concern on Friday: It appears to spread quickly, and it's not yet known how effective existing vaccines are against it. According to Dr. Anthony Fauci, it'll be about two weeks before more is known about its transmissibility, severity and other characteristics.
The Biden administration acted quickly to try and slow the spread of the new variant in the U.S., imposing travel restrictions on eight countries in Southern Africa. Officials are also urging Americans to get vaccinated or booster shots. On Monday, President Biden sought to calm Americans, characterizing the variant as cause for concern, but not panic.
While Powell acknowledged that the economy is continuing to strengthen and conditions in the labor market are still improving, he also reminded senators that over the summer, the rapidly spreading Delta variant slowed the economic recovery and intensified supply chain disruptions.
At the same time, Americans have been slammed by higher than anticipated prices as the U.S. struggles to reopen. Last month's Consumer Price Index showed inflation had risen at its fastest annual rate in more than 30 years at 6.2%.
"Pandemic-related supply and demand imbalances have contributed to notable price increases in some areas. Supply chain problems have made it difficult for producers to meet strong demand, particularly for goods. Increases in energy prices and rents are also pushing inflation upward," Powell said during his remarks. The remarks about inflation echo past statements by Powell that it could persist into the third quarter of 2022. "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 said. "We are committed to our price-stability goal. We will use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched." When asked by lawmakers how the Federal Reserve got its inflation forecasts wrong, Powell acknowledged they did not predict the supply chain issues in their projections. Treasury Secretary Janet Yellen also testified before senators on the state of the economic recovery from the pandemic Tuesday. Yellen has said if the U.S. wants to bring inflation down, it needs to make progress with the pandemic and when it succeeds, she anticipates prices will go return to normal some time in the second half of next year.
Meanwhile, the U.S. continues to make progress in bringing down unemployment. On Friday, the Labor Department will release the jobs report for November. Last month, the economy added a higher than anticipated 531,000 jobs and revised the two prior reports upwards, after disappointing September and August numbers. The unemployment rate last month fell to 4.6%.