Jerome H. Powell, the chairman of the Federal Reserve, compared setting monetary policy to stumbling in an unlit room: You walk out the door carefully to avoid making a painful mistake.
The analogy is likely to ring particularly true after Omicron’s scrambled jobs report for January, as the virus clouds the pace of progress in the labor market and leaves policymakers in the dark. But the Fed may not have the luxury of slowly slipping into the gloom this time around.
Mr Powell and his colleagues are set to raise interest rates for the first time since 2018 in March, a move intended to calm the economy as inflation rises at its fastest pace in nearly 40 years. He will likely be in the awkward position to make this decision – and signal what comes next, as markets point to up to five rate hikes in 2022 – at a time when the latest labor market data looks lackluster at best. , at worst dark.
The Fed will review a few months of virus-depressed labor market data as officials try to assess the real strength of the economic rebound: The Omicron variant is already in the doldrums in the United States, and there is no little reason to expect a prolonged lull in hiring after a year of dizzying progress in the job market.
But the virus surge and its economic repercussions underscore a challenge the Fed is likely to face throughout 2022 as it scales back support. It’s hard to know what will happen next in a coronavirus-hit business environment.
“We will be humble and nimble,” Mr. Powell said. embarked on the political path of the central bank, speaking at a press conference last month.
The Fed typically navigates by watching incoming labor market data — particularly the unemployment rate, lately — and inflation data.
But it could take a few months for the jobs picture to clear up, and in the meantime, inflation is soaring. Used vehicle prices, which have been a major driver of the overall price increase, may be on the verge of stabilizing but have yet to noticeably calm down. Gasoline prices are go back upfood is more expensive and rents have risen sharply.
This will likely leave the Fed, which typically withdraws aid at times of strong labor market gains, to act when the labor market experiences a bump.
“It’s Omicron fog,” said Diane Swonk, chief economist at accounting firm Grant Thornton. “It will not give us visibility.
Fed officials are trying to ensure they don’t fall behind the high inflation curve, allowing it to become so locked into consumer and business expectations that it becomes a permanent feature of the economic landscape.
How the Fed finds equilibrium — and how much it is slowing the economy with its rate hikes this year — could also have significant policy implications. Voters are already gloomy about the outlook for the economy and President Biden is hurting in the polls.