John C. Williams, Chairman of the Fed ”with how quickly to withdraw economic support.
It is still too early to know how the Omicron variant, which public health officials in Southern Africa identified last week, will affect the economy, Williams said in an interview with The New York Times on Tuesday. But if the new version of the virus causes another wave of infections, it could exacerbate the disruptions that have driven prices up to their fastest pace in three decades.
“Obviously that adds a lot of uncertainty to the outlook,” Williams said of the new variant. He later added that a risk with the new variant is that it “will pursue this excess demand in areas that have no capacity and block recovery in areas where we actually have capacity.”
This, he said, “would mean a somewhat slower rebound overall” and “would also increase those inflationary pressures, in areas that are in high demand.”
Mr Williams’ comments are the latest indication that policymakers are increasingly concerned about inflation and are considering how to respond. Jerome H. Powell, the Fed chairman, signaled on Tuesday that the central bank could withdraw its economic support faster than initially expected and suggested such a move could come as early as the Fed meeting. of December.
The Fed had bought $ 120 billion in government guaranteed securities each month during much of the pandemic to support the economy by keeping money flowing in financial markets. In November, officials announced their intention to phase out this program gradually until the end of the year and the first half of 2022, a process known as “tapering.” But Mr Powell said on Tuesday that the central bank could complete its bond purchases faster.
Mr Williams, who is vice chairman of the Fed’s Open Market policy-making committee and a key advisor to Mr Powell, did not explicitly endorse a faster reduction process, saying that “there is a lot to learn and digest and think about coming to the next meeting.
What you need to know about inflation in the United States
But he stressed that the economy has rebounded more strongly this year than he and other officials expected, and said the unemployment rate has fallen rapidly. This economic strengthening at a time of high inflation could justify less support from the Fed, he said.
“The question is, would it make sense to end these purchases a little earlier, perhaps in a few months, given the strength of the economy? ” he said. “It’s a decision, a discussion, I think we’ll have to grapple with it.”
Inflation has turned out to be a bigger problem than the Fed and most private sector economists predicted earlier this year. In March, Fed officials said they expected their preferred measure of inflation to show consumer prices to rise 2.4% at the end of 2021; in September, they revised that forecast to 4.2 percent.
This is likely to increase further. The central bank’s preferred inflation indicator climbed 5% on its last reading. Policymakers are watching closely what is happening in a report on the Consumer Price Index due for release on December 10, just before the Fed meeting on December 14 and 15.
Mr Williams admitted that inflation had turned out to be stronger and more lasting than he had initially expected. But he said the error was not the result of a misunderstanding about how the economy works; rather, it was his failure to anticipate the resurgence of the pandemic itself. Mr. Powell made similar comments in testimony to the Senate on Tuesday.
The spread of the Delta variant over the summer delayed workers’ re-entry into the workforce by disrupting child care and making some people nervous about returning to work in person. It has also contributed to supply chain problems by causing a new round of factory closures in parts of the world and prolonging the pandemic era shift from consumer spending from services to goods.
“These are all things that are driven – I think a lot, not totally, but a lot – about Covid, and the ability so far for us to take control of that,” he said. . “It lasts a lot longer than expected. “
The new variant, added Mr Williams, “has the potential to simply extend this process that we have been following.”
If the Omicron variant further delays the return of workers and the alleviation of supply shortages, it could lead to higher and more lasting inflation. But a new wave of virus cases could also hurt demand for the economy, causing people to spend less in restaurants and cinemas and sparking another wave of layoffs.
Understanding the supply chain crisis
This would put the Fed in a difficult position, forcing it to choose between withdrawing support for the economy in the face of rising unemployment and letting inflation accelerate unchecked.
Mr. Powell has sometimes acknowledged that the two sides of the Fed’s job – fostering as many jobs as possible and keeping prices stable – could come into tension. He praised the conflict again on Tuesday, while stressing that controlling inflation is a key objective.
“To get back to the kind of great job market we had before the pandemic, we’re going to need a long expansion,” Mr. Powell said. “To achieve this, we will need price stability.”
Mr Williams said he was confident the Fed could chart a course that would allow the labor market to continue to improve while keeping inflation under control.
“How you deal with these trade-offs is something that we have studied for a long time and have had experience with,” he said. He added that he has so far seen little evidence that consumers and businesses expect higher inflation to last in the long run – a major concern for the Fed, as a lasting shift in expectations could make inflation more difficult for policymakers to control.
“If inflation stays too high for too long, it will eventually seep into people’s long-term inflation expectations,” he said.
Fed officials are expected to know more about the Omicron variant when they hold their meeting in mid-December. They will also have a better read on the state of the economy by then. The Labor Department will release its monthly employment and unemployment report on Friday, and the inflation update will also offer new evidence.
But Mr Williams said the long-term effects of the pandemic were more difficult to assess. The brief increase in pre-Delta activity over the summer suggests that many Americans are eager to revert to their old ways of socializing in person, he said. But other changes around work could prove to be more lasting, which could affect the economy in ways that are difficult to predict.
“Now that we’ve learned to live this way, are we going to go back to the old ways? ” He asked. “I have to say I don’t know.”