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Powell: Fed asset purchases could end 'few months early' as Omicron worries rise

Federal Reserve Chairman Jerome Powell said Tuesday that the central bank could end its asset purchase program a few months sooner than currently planned, signaling confidence in the economic recovery despite jitters over the Omicron variant of the coronavirus.

“We now look at an economy that is very strong and inflationary pressures that are very high and that means it's appropriate for us to discuss at our next meeting — which is in a couple weeks — whether it would be appropriate to wrap up our purchases a few months early,” Powell told Congress on Tuesday.

Earlier this month, the Fed's policy-setting committee announced it would start to pare back its purchases of agency mortgage-backed securities and U.S. Treasuries, which it had been absorbing at a pace of about $120 billion a month since the depths of the pandemic.

The Fed has begun slowing that process by about $15 billion each month, which would bring the so-called quantitative easing program to a full stop by the middle of next year.

But in recent weeks, a number of Fed officials expressed the view that it may be appropriate to accelerate that process and end the program earlier.

“If things continue to do what they've been doing, then I would completely support an accelerated pace of tapering,” San Francisco Fed President Mary Daly told Yahoo Finance on Nov. 23.

Daly’s comments preceded news headlines on the identification of the Omicron variant of the coronavirus, which rattled markets the day after Thanksgiving. Powell’s remarks solidify the view that policymakers may stay the course on hastening the taper despite the new downside risks.

"This does sound like a significant change of tone from Powell," said Fitch Chief Economist Brian Coulton, who added that wrapping up the taper process earlier would give the Fed more flexibility on its more potent monetary policy tool: eventually raising interest rates from near-zero.

The S&P 500 (^GSPC) slipped over 1.60% after Powell’s comments.

Omicron risks

Powell said that developments over the coming weeks will inform any discussion of policy changes.

“We'll get a better sense of the new COVID variant before we make that decision,” Powell said.

For the Fed, Omicron complicates the picture on inflation, where central bankers have acknowledged the risk of eye-popping inflationary pressures becoming more entrenched. Powell on Tuesday said he would no longer use the word “transitory” to describe high prints on inflation.

On one hand, the emergence of a new variant threatens to extend supply chain hold ups that have backed companies into raising prices. It also raises the possibility of a slowdown in the labor market recovery, where over 4 million people remain out of the labor force compared to pre-pandemic levels.

“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,” Powell wrote in prepared testimony in advance of Tuesday’s hearing.

Powell said it was too early to incorporate Omicron into Fed forecasts and any decision on its tapering process.

Fed watchers note that in the coming week, markets may be particularly sensitive to communication from central bankers.

“It would behoove the Fed to be as consistent and orderly as possible with the tapering plans,” JPMorgan Asset Management Global Market Strategist Meera Pandit told Yahoo Finance before the hearing.

The Fed’s next policy-setting meeting is scheduled for Dec. 14 and 15.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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