Omicron Fed Inflation All in Focus

Jeff Bratzler |

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The Centers for Disease Prevention and Control has identified the first confirmed cases of Omicron in the U.S. The U.S. joined more than two dozen other countries in reporting at least one case of the Omicron variant, which was first identified last week by scientists in South Africa. The latest development renewed concerns about the potential impact of the new variant for the domestic economy. A day earlier Moderna CEO Stephane Bancel told the Financial Times that the company's current COVID-19 vaccine would likely see a "material drop" in effectiveness against Omicron, but that more data was still needed on the variant. This commentary, as well as ongoing uncertainty over the transmissibility and severity of disease caused by the new variant, also contributed to the broader market slide. The market doesn’t like an information vacuum, and now we have two. Not only did we have the CEO of Moderna expressing concern that his vaccines may not have full coverage for Omicron, but then you had Powell throw this wrench into the mix at the hearing saying that maybe we'll speed up taper by a few months. That's no small issue, because the market had anticipated over six or seven months that we would get another $660 billion of liquidity. Powell told the Senate Banking Committee that it would be appropriate for the central bank to consider completing its asset-purchase tapering process "a few months sooner" than previously telegraphed. Market participants had been anticipating that the Fed might strike a more supportive stance for longer especially given concerns over the latest coronavirus variant. But instead, Powell suggested his priority was on curbing persistently elevated levels of inflation, and the Fed chair added it was "probably a good time to retire" his description of inflation as "transitory." The reality is hotter inflation coupled with a strong economic backdrop could end the Fed’s bond buying program as early as the first quarter of next year. Ultimately, the transitory view on inflation has officially come to an end as Powell’s comments reinforced the notion that elevated prices are likely to persist well into 2022. With potential changes in policy on the horizon, market participants should expect additional market volatility in this uncharted territory.