Dive Brief:

• In a joint congressional hearing Tuesday morning, Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen addressed the threat the COVID-19 omicron variant poses to economic recovery in the U.S.
• In his testimony before the Senate Banking Committee, Powell cautioned that omicron could potentially exacerbate unemployment and inflation.
• The “factors pushing inflation upward will linger well into next year,” Powell added, pointing to supply chain difficulties and increases in energy prices, wages and rents. The Fed had predicted inflation would abate over the next year.

Dive Insight:

The discovery of the omicron variant of the COVID-19 pandemic, first reported in South Africa this month, adds a new wrinkle to economic recovery. The World Health Organization on Friday classified omicron as a variant of concern.

It wouldn't be the first COVID-19 variant to disrupt the banking industry, however. A surge in the delta variant of the virus this summer prompted a number of banks — notably, Wells Fargo, four times — to push back planned employee returns to the office.

“The recent rise in COVID-19 cases and the emergence of the omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation,” Powell said Tuesday. “Greater concerns about the virus could reduce people's willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.”

The hearing marked Powell's first appearance on Capitol Hill since President Joe Biden last week tapped him to serve a second four-year term as Fed chair. The central bank has vowed to keep interest rates near zero to stimulate growth in the near term, although regulators have targeted 2% inflation as a long-term goal.

“We understand that high inflation imposes significant burdens, especially on those less able to meet the higher costs of essentials like food, housing and transportation,” Powell said Tuesday. “We are committed to our price-stability goal. We will use our tools both to support the economy and a strong labor market, and to prevent higher inflation from becoming entrenched.”

Inflation has surged over the course of the pandemic. The consumer price index was 6.2% as of October.

Yellen also touched on the new variant in Tuesday's hearing.

“Of course, the progress of our economic recovery can’t be separated from our progress against the pandemic, and I know that we’re all following the news about the omicron variant,” she said. “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.”

Yellen, however, expressed optimism that recovery would continue in the face of the omicron variant.

“At this point, I am confident that our recovery remains strong and is even quite remarkable when put in context," she said. "We should not forget that last winter, there was a risk that our economy was going to slip into a prolonged recession.”