Powell says Omicron causes uncertainty over inflation

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Omicron’s emergence raises uncertainty about inflation, according to the Federal Reserve chair.

Jerome Powell stated that rising rates of Covid and the addition of the new version pose new threats to the US’ economy.

Powell used to call recent high inflation rates transitory in the past. He said that they should be considered “retired”.

He suggested that the Fed might consider reducing its stimulus to bond-buying sooner.

Its asset buying programme has been widely praised by the Federal Reserve for keeping the country from falling into recession during the worst of the pandemic. The Federal Reserve began this month reducing its support. It is now moving towards raising the cost of borrowing. That’s the typical policy strategy to control inflation.

There has been some debate about whether or not the aid should be withheld sooner.

  • Prices in the USA are rising at their fastest pace for over three decades

Some economists suggest that faster tapering is needed and an earlier shift to higher interest rates to combat rising prices.

Powell claimed that rising prices were caused by pandemic disruptions to supply chains and changes in consumer demand. Powell predicted that inflation would recede as the pandemic ended.

Omicron’s rise has shaken international markets and raised concerns about possible restrictions to travel, economic, or social activity.

‘Greater concerns’

Powell explained to the Senate banking committee that “the recent rise of Covid-19 cases, as well the emergence Omicron variant poses downside risks to employment activity and economic activity, and increased uncertainty regarding inflation.”

He said that greater concerns over the virus might reduce the willingness of people to work in person. This would slow down progress in the labour markets and increase supply chain disruptions.

Powell answered a question about inflation and said that it was transitory.

He stated that he believes high inflation will persist into the middle of next fiscal year and therefore the central banks is likely to speed up the pace of the withdrawal of its asset buying programme.

Markets have taken the statement as an indication of a change in tone by the Federal Reserve Chair, which indicates a shift toward tighter monetary policies.

Ian Lyngen, BMO Capital Markets said that “We have long held that the Fed owns the ‘transitory characterisation’ and that the decision by the chair to do so is a determinedly hawkish move.”

Source: BBC.com

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