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Flexibility key for central banks navigating Omicron variant uncertainty

EconomyDec 02, 2021 11:59AM ET
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© Reuters. FILE PHOTO: Federal Reserve Board building is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

By Ann Saphir and Jonnelle Marte

(Reuters) - The Omicron variant of COVID-19 could potentially prolong some of the supply chain challenges that heightened inflationary pressures during the pandemic and central banks need flexibility to address the uncertain landscape, a panel of economic experts said during the Reuters Next conference on Thursday.

"On the supply side, it means the inflationary pressures will probably persist even longer," said Kristin Forbes, an economics professor with the Sloan School of Management at MIT. "And given how tight everything is right now, that could mean some notable increases in inflation ... due to supply side constraints."

The economic hit from the variant could potentially be less dramatic than what was seen with previous variants, depending on how quickly the virus spreads, the effectiveness of vaccines and the severity of the symptoms, the panelists said.

Central banks could struggle to navigate the uncertainty caused by the evolving virus at a time when many are withdrawing some of the support they provided during the pandemic while also combating elevated inflation, the panelists said.

Policymakers are aware that they could face substantial risks in financial markets, credit markets and in inflation if there is a negative reaction to a shift in monetary policy, said Jose Perez-Gorozpe, head of emerging markets credit research at S&P Global (NYSE:SPGI) Ratings.

Several Federal Reserve officials have shared publicly that they are open to winding down their asset purchases more quickly so they can raise interest rates sooner if needed to address inflation, a topic that will be discussed during their Dec. 14-15 meeting.

But Robin Brooks, chief economist for the Institute of International Finance, said the Fed may have complicated the exit strategy from its quantitative easing (QE) program when it committed to purchasing a fixed amount of securities each month.

"We could have had variable amounts, given the uncertainty of the COVID crisis, the rapidity of the recovery," Brooks said. "We could have basically done a flexible QE program in a way that would have front run this whole tapering discussion that we're struggling with now."

To watch the Reuters Next conference please register here

Flexibility key for central banks navigating Omicron variant uncertainty

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