Fed’s Williams says Omicron variant may prolong supply-demand imbalances

John Williams, CEO of the Federal Reserve Bank of New York, speaks at an event in New York

(Reuters) – The latest COVID-19 variant could extend some of the supply-chain challenges and shortages that have led to higher inflation, and Federal Reserve officials will need to factor that in as they decide how to withdraw their monetary policy support, New York Fed President John Williams said.

“Clearly, it adds a lot of uncertainty to the outlook,” Williams said, referring to the Omicron variant of COVID-19, during an interview with the New York Times that was published on Wednesday.

If the variant leads to continued demand for goods and services that are currently facing shortages, and if it stalls the recovery in other areas, that could lead to a “somewhat slower rebound overall,” Williams said. It might also “increase those inflationary pressures, in those areas that are in high demand,” he added.

Last month, the Fed began reducing its purchases of Treasuries and mortgage-backed securities from $120 billion per month at a pace that would put it on track to complete the wind-down of its bond-buying program by mid-2022.

On Tuesday, Fed Chair Jerome Powell told the U.S. Senate Banking Committee that U.S. central bank policymakers would discuss at their Dec. 14-15 meeting whether to end that program a few months earlier than had been anticipated.

Williams did not say whether he supports speeding up the taper of the asset purchases, but noted that Fed officials will have a lot to weigh at their next policy meeting, including more data on inflation, employment and the economic effects of the Omicron variant.

“The question is: Would it make sense to end those purchases somewhat earlier, by maybe a few months, given how strong the economy is?” Williams said. “That’s a decision, discussion, I expect we’ll have to grapple with.”

(Reporting by Jonnelle Marte; Editing by Paul Simao)