Stocks dive over the potential economic fallout from the omicron variant

Nov 30, 2021
Originally published on November 30, 2021 6:48 pm

Updated November 30, 2021 at 4:08 PM ET

Stocks took a big tumble on Tuesday as investors weighed the potential economic fallout from the new omicron coronavirus variant.

The Dow Jones Industrial Average closed down 652 points.

"Price increases have spread much more broadly in the recent few months across the economy, and I think the risk of higher inflation has increased," warned Federal Reserve Chair Jerome Powell in testimony before the Senate Banking Committee.

Powell warned that growing concern over the coronavirus, including the new omicron variant, could make people wary about returning to in-person jobs. That could slow the recovery of the labor market and prolong the supply-chain bottlenecks that have contributed to the highest inflation in more than three decades.

The central bank chief said elevated inflation is likely to continue well into next year.

Fed policymakers are set to meet in about two weeks. Powell said that by then, they may have more information about the possible health effects of the omicron variant and how it responds to existing vaccines.

With rising price pressures, the central bank has begun to dial back its aggressive bond-buying program, which was put in place in the early part of the coronavirus pandemic to support the financial markets. But Powell suggested that the process could be accelerated, so bond purchases would end a few months earlier than next summer.

Ending the bond purchases early would give the Fed more flexibility to raise interest rates, if necessary, to keep inflation from spiraling out of control.

Copyright 2021 NPR. To see more, visit https://www.npr.org.

ARI SHAPIRO, HOST:

Americans may be wrestling with higher prices well into the new year. Federal Reserve Chairman Jerome Powell told lawmakers today inflation is likely to remain high through the middle of 2022. Powell says that's largely because of ongoing supply chain problems, and he warned the new coronavirus variant could make things worse. NPR's Scott Horsley is here with us. Hi, Scott.

SCOTT HORSLEY, BYLINE: Hi, Ari.

SHAPIRO: The central bank used to talk about inflation as a transitory problem. Does this change that assessment?

HORSLEY: Yeah. Powell says it's probably time to retire that word transitory, not because he thinks inflation's become a permanent problem, but it is lasting longer than a lot of forecasters - including those at the central bank - anticipated. Powell and his colleagues still expect inflation to ease once the pandemic fades, but that is taking a long time.

(SOUNDBITE OF ARCHIVED RECORDING)

JEROME POWELL: Generally, the higher prices we're seeing are related to the supply and demand imbalances that can be traced directly back to the pandemic and the reopening of the economy. But it's also the case that price increases have spread much more broadly in the recent few months across the economy, and I think the risk of higher inflation has increased.

HORSLEY: And now, Ari, you've got this new omicron variant. Powell doesn't think we're facing another downturn like we saw when the pandemic first struck, but it is possible the new variant will make people more wary about going back to in-person jobs. If there are fewer workers, it could take longer to unplug those supply chain bottlenecks. And that means the resulting inflation could stick around longer as well.

SHAPIRO: You're describing so many unknowns. The pandemic has been so unpredictable already. What does that mean for people trying to make economic predictions like this?

HORSLEY: It's really challenging because this has not been a straight-line recovery. It's been more like two steps forward, one step back. We saw that over the summer with the delta variant, which depressed job growth and economic activity. We could see something similar with omicron. Right now there's just a lot of uncertainty. Treasury Secretary Janet Yellen echoed the president in saying, this is all the more reason for people to take precautions.

(SOUNDBITE OF ARCHIVED RECORDING)

JANET YELLEN: We're still waiting for more data. But what remains true is that our best protection against the virus is the vaccine. People should get vaccinated and boosted.

HORSLEY: Of course, one big question is just how effective the existing vaccines and boosters are against this new variant. We hope to know more about that in the coming weeks. But the administration's saying, don't wait. Get your shot now, if you haven't done so already.

SHAPIRO: Apart from the economic consequences, there are political consequences to this, right? So what impact is inflation having on the president's approval rating and how are Republicans trying to capitalize on it?

HORSLEY: Inflation has been a political gift for the GOP. Republican Senator Pat Toomey of Pennsylvania, who sits on the banking committee, argues that Democratic spending proposals are helping to fuel these higher prices.

(SOUNDBITE OF ARCHIVED RECORDING)

PAT TOOMEY: Price hikes are everywhere, from the cost of a Thanksgiving meal, which rose by 14% over last year, to the pump, where gas has reached as high as $6 a gallon in some places. And inflation is a tax that's eroding Americans' paychecks every day now.

HORSLEY: Now, Toomey may be laying it on a little bit thick there. The average price of gasoline nationwide is $3.39 a gallon. And even with that increase, turkey and all the trimmings still cost less than six bucks a person. But there's no question inflation is hitting people in their pocketbooks, and Powell acknowledged that hardship today. He says the Fed will use its tools to keep inflation from spiraling out of control. Towards that end, the Fed chairman said he and his colleagues may end their bond-buying program a few months earlier than expected, which would give the Fed more flexibility if it decides it needs to raise interest rates next year. All of this is weighing on Wall Street. Investors dumped stocks today, and the Dow Jones Industrial Average tumbled 652 points.

SHAPIRO: That's NPR's Scott Horsley. Thank you.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.