Fed says economic optimism showing signs of cooling in places

As the omicron variant of the coronavirus spread. 
Image: Stefani Reynolds/Bloomberg

The US economy grew at a modest pace in the final weeks of last year, the Federal Reserve said, but business expectations cooled in some places as the omicron variant of the coronavirus spread.

“Optimism remained high but waned somewhat, as the share of firms expressing positive expectations for continued economic growth over the next six months narrowed,” the US central bank said in its Beige Book survey Wednesday, based on anecdotal reports from its business contacts around the country.

Ten of the Fed’s 12 regional banks said that the omicron variant was affecting activity and adding to labor-market challenges. Officials meet later this month and are expected to signal they’re ready to raise interest rates in March from near-zero levels. Omicron remains a source of uncertainty, but Chair Jerome Powell told lawmakers Tuesday that he expects the economy to be able to weather it in coming months.

The Beige Book was based on information collected through January 3 and compiled by the Federal Reserve Bank of Kansas City.

Omicron’s impact

  • “The regional economy grew at a subdued pace in recent weeks, restrained by intensifying supply disruptions, labour shortages, and the omicron outbreak. However, holiday season sales were reported to be fairly solid.” — Federal Reserve Bank of New York.
  • “The latest wave of infections driven by the omicron variant has negatively impacted the travel and hospitality industry, with hotel bookings being cancelled and staff shortages at airlines.” — Federal Reserve Bank of San Francisco.
  • “A major airline said they were just beginning a solid recovery from the slowdown caused by the delta variant but now they are again seeing a pullback in demand from the omicron variant.” — Federal Reserve Bank of Dallas.
  • “Hospitality and tourism firms widely reported improved revenues, but future sentiment was mixed due to concerns over the omicron variant, particularly among firms catering to large events.” — Federal Reserve Bank of Minneapolis.
  • “A few employers expressed concerns that the omicron variant of Covid-19 would add to labor challenges as more employees may be required to quarantine.” — Federal Reserve Bank of Richmond.

“Contacts from most Federal Reserve districts reported solid growth in prices charged to customers, but some also note that price increases had decelerated a bit,” the Fed said.

US central bankers are under pressure from Congress and the public to tackle the hottest inflation since the 1980s. During his confirmation hearing for a second term as central bank chief Tuesday, Powell emphasized that the central bank is focused on price stability.

“If we have to raise interest rates more over time, we will,” Powell told the Senate Banking Committee Tuesday. “We will use our tools to get inflation back.”

Policy makers including Fed Governor Christopher Waller, Atlanta Fed President Raphael Bostic and Cleveland Fed President Loretta Mester have signaled that they want to raise interest rates as soon as March, should current economic conditions hold. In December, all Fed officials indicated that they supported raising rates from near zero sometime this year, with a median estimate showing three hikes in 2022.

© 2022 Bloomberg

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