Treasury Secretary Janet Yellen and Federal Reserve Board Chair Jerome Powell on Tuesday illustrated just how many unknowns were facing the U.S. economy as a new strain of the virus that causes COVID-19 emerged and U.S. lawmakers battled over whether to raise the country’s debt limit.
Yellen and Powell appeared before the Senate Committee on Banking, Housing, and Urban Affairs as a new variant of the virus, dubbed omicron, was showing up in multiple countries. Experts are still trying to assess whether omicron is more dangerous than the delta variant, the dominant strain worldwide.
Both Yelen and Powell addressed the emerging new variant in their prepared remarks.
Yellen echoed President Biden’s call Monday for Americans to get vaccinated against the virus if they haven’t already and to get a booster shot if eligible. But she did not address the new variant’s potential impact on the economy.
“At this point, I’m confident that our recovery remains strong and is even quite remarkable when put in context,” Yellen said, noting that a year ago, the concern was that the United States might “slip into a prolonged recession.”
Powell expressed a little more concern, saying, “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.” He said people’s concerns about the virus could reduce their willingness to work in person, slowing hiring and intensifying supply chain disruptions.
Effects on inflation
Lawmakers were eager to grill Powell over how he plans to address rising inflation, which hit a 31-year high of 6.2% for the year ending in October. The Fed chair suggested that the central bank might accelerate its plan to slow down the rate of asset purchases it has been using to stimulate the economy during the pandemic.
Powell conceded, however, that scientists need more time before they can give policymakers additional details about the severity of the omicron variant.
“What I’m told by experts is that we’ll know quite a bit about those answers within about a month,” he said. “We’ll know something, though, within a week or 10 days. Then, and only then, can we make an assessment of what the impact would be on the economy. As I pointed out in my testimony, for now, it’s a risk. It’s a risk to the baseline. It’s not really baked into our forecast.”
“When you back away from this testimony and the Q&A, what you are left with is a high degree of uncertainty,” Mark Hamrick, senior economic analyst for Bankrate.com, told VOA. “It is frustrating for everybody who’s paying attention to COVID-19, as well as those who are participants in financial markets. A high degree of uncertainty can be regarded as toxic for investors.”
‘We have to be humble’
Senator Thom Tillis, a Republican from North Carolina, demanded to know when the central bank would get back to “a normal execution of Fed policy” rather than suggesting that it is possible that the country might have to return to broad lockdowns as it did in the winter of 2020.
Powell pushed back on the idea that the Fed is still responding to the virus in the way it did in the early months of the pandemic.
“I’m not thinking that the effects on the economy will be remotely comparable to what happened last March with the shutdowns — or that there will be additional shutdowns,” he said.
He said that he expected the economic consequences of new waves of the virus to diminish, but added, “We have to be humble about our ability to predict this or to really understand. But we’re not at all thinking that we haven’t made progress on the economy.”
Debt limit fears
Treasury Secretary Yellen used some of her time to focus on a different threat to the U.S. economy. She pointed out that the federal government will, sometime in the coming weeks, reach the statutory limit on borrowing by the Treasury, known as the debt limit.
Yellen warned members of Congress that after December 15, she cannot not guarantee that the United States will be able meet its financial obligations unless the Treasury is allowed to borrow money above the debt limit.
“I cannot overstate how critical it is that Congress address this issue,” Yellen said. “America must pay its bills on time and in full. If we do not, we will eviscerate our current recovery. In a matter of days, the majority of Americans would suffer financial pain as critical payments like Social Security checks and military paychecks would not reach their bank accounts. And that would likely be followed by a deep recession.”
Democrats, currently in charge of the House and Senate, have the ability to raise the debt limit but have been reluctant to do so without Republican support. They have insisted that Republicans must share the responsibility for raising the federal debt, which was created by policies adopted by both parties.
Republicans have been saying very explicitly, for most of the last year, that they will not provide any votes, and that the Democrats must raise the debt limit on their own.