Omicron Covid-19 variant poses downside risks to US economy: Fed Chief

The recent rise in Covid-19 cases and the emergence of the Omicron variant pose downside risks to US employment and economic activity, Powell said

The recent rise in Coronavirus (Covid-19) cases and the emergence of the Omicron variant pose downside risks to US employment and economic activity and increased uncertainty for inflation, Federal Reserve Chairman Jerome Powell said in a written 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," Powell on Monday afternoon added in the testimony prepared for a hearing before the Senate Banking Committee scheduled on Tuesday morning.

Powell noted that pandemic-related supply and demand imbalances have contributed to notable price increases in some areas, with the price index for personal consumption expenditures up 5 per cent over the 12 months ending in October, Xinhua news agency reported.

"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. In addition, with the rapid improvement in the labor market, slack is diminishing, and wages are rising at a brisk pace," he said.

Powell also added that the central bank understands that high inflation imposes significant burdens, especially on those less able to meet the higher costs of essentials like food, housing, and transportation.

"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," he said.

The Fed has pledged to keep the federal funds rate unchanged at the record-low level of near zero since the start of the pandemic. The central bank began in November to reduce its monthly asset purchase program of $120 billion by $15 billion. At this pace, the Fed would end its asset purchases by June 2022.

It's too soon to judge the health implications and the economic effects of the emerging Omicron variant, according to an analysis released by Oxford Economics on Monday.

"If the Omicron variant ends up having a significant impact on the economy, then governments and central banks would likely focus their response on the demand impacts rather than the more ambiguous inflation impact," the analysis said.