Omicron threatens to stoke US inflation, warns top Fed official

A top Federal Reserve official has warned that the Omicron coronavirus variant threatens to fuel soaring inflation in the US by putting further pressure on supply chains and worsening worker shortages.

“If it turns out to be a bad variant it could exacerbate the upward price pressures we’ve seen from the supply-chain problems,” Loretta Mester, president of the Cleveland Fed, told the Financial Times in an interview on Thursday.

Ms Mester added there was a risk that if Omicron were “more virulent than Delta” then people who lost or quit their jobs during the pandemic would continue to stay at home. “The fear of the virus is still one of the factors holding people back from re-entering the labour force,” she said.

Crunch

A global supply chain crunch and US worker shortages, which have compelled employers to raise wages to attract new hires, are two of the main factors that have sent inflation skyrocketing to a 30-year high.

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The comments from Ms Mester are the latest sign that the Fed intends to press ahead with the withdrawal of the massive stimulus it put in place at the start of the pandemic, despite the potential risk to the US economy from the new variant.

Earlier this week Jay Powell signalled that fighting inflation was the US central bank’s top priority during two days of testimony to Congress in which he only fleetingly acknowledged the damage that Omicron might do to the recovery.

Ms Mester, who will be a voting member of the policy-setting Federal Open Market Committee next year, also played down the risk that the variant could damp demand - especially if the current crop of vaccines prove to be effective.

“The economy is better at dealing with these variants,” she said. “The demand side effects have been lessened, but we’ve seen these supply side effects, which are related to the virus.”

Ms Mester echoed Powell by saying she would support a quicker withdrawal of the Fed’s massive bond-buying programme as a form of “insurance” that would give the central bank more flexibility to raise interest rates next year.

“We have to entertain the risk that those persistently high numbers of inflation could become more embedded,” she said on Thursday. “It’s really about giving us the optionality . . . to make moves on the interest rate path.”

Ms Mester said she would support at least one rate increase next year, and that two might be “appropriate”.

Purchases

Mr Powell this week told Congress this week he believed the Fed should “consider wrapping up the taper of our asset purchases . . . perhaps a few months sooner”.

Mary Daly, president of the Federal Reserve Bank of San Francisco, also expressed her support for an earlier taper on Thursday. “If we didn’t have higher inflation readings, you might let the economy go a little bit more to see if we can get through Covid and have those [unemployed] individuals come back,” she said at an event hosted by the Peterson Institute for International Economics.

Raphael Bostic of the Atlanta Fed has indicated his backing for a quicker taper as well, while Fed vice chair Richard Clarida said last month he supported the FOMC discussing the issue at its next policy meeting scheduled for December 14th and 15th. – Copyright The Financial Times Limited 2021