Fed Signals Moves to Quell Not-So-Transitory Inflation

New virus strain could worsen labor, supply problems, Powell says

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Federal Reserve Chair Jerome Powell signaled Tuesday that the Fed might be in more of a hurry to pull back on its easy money policies due to stubborn inflation, with the emergence of the new omicron strain of COVID-19 muddling the picture.

Powell told the Senate Banking Committee that inflation pressure had grown, and that the central bank is considering steps to rein it in sooner than previously anticipated.

“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. “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.”

Public health authorities identified the new COVID-19 strain last week and flagged it as a variant of concern, despite a current lack of important facts about its characteristics. The news rattled investors and triggered a stock sell-off on Black Friday. That fueled fears that the new strain could hinder the economic recovery—and prompted the Fed to consider omicron’s potential impact on inflation, which is already running at 6.2%, its hottest level in more than 30 years.

Earlier this month, the Fed began the process of backing off the two main forms of emergency support it’s given the economy through the pandemic—monthly purchases of financial assets, and near-zero interest rates, both designed to bolster the economy and encourage hiring. The Fed began tapering its asset purchases this month, and investors expect the central bank to start raising the benchmark fed funds rate as early as June 2022 in an effort to move inflation back toward its long-term 2% inflation rate target.

Powell said he was now eyeing whether to roll back those asset purchases faster than previously anticipated in light of inflation worries.

“I do think that the threat of persistently higher inflation has grown,” Powell said. “My baseline expectation is still that inflation will move back down over the course of the year, closer to our target. The risk of more persistent inflation has risen. You have seen our policy adapt, and you will see it continue to adapt. We will use our tools to make sure higher inflation does not become entrenched.”

Powell also conceded it was time to stop using the word he’s frequently invoked to describe inflation over the past several months: “transitory.”

“The word ‘transitory’ has different meanings to different people,” Powell said. “To many, it carries the sense of ‘short-lived.’ We tend to use it to mean that it won’t leave a permanent mark in terms of higher inflation. I think it’s probably a good time to retire that word and try to explain more clearly what we mean.” 

The Federal Open Market Committee, the Fed body that controls monetary policy, is set to meet Dec. 14 and 15.

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Sources
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  1. Senate Banking Committee. “Statement by Jerome H. Powell Chair Board of Governors of the Federal Reserve System before the Committee on Banking, Housing, and Urban Affairs U.S. Senate November 30, 2021.”

  2. C-SPAN. “Treasury Secretary and Federal Reserve Chair Testify on CARES Act Oversight.” (Video. 50:55 and following.)

  3.  World Health Organization. ”Classification of Omicron (B.1.1.529): SARS-CoV-2 Variant of Concern.”

  4. Food and Drug Administration. “Coronavirus (COVID-19) Update: FDA Actively Working to Investigate, Address Potential Impacts of Omicron Variant; Urges Vaccination and Boosters.”

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