US Federal Reserve Chair Jerome Powell. Source: Reuters.
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  • The US economy looks to be in a strong enough position to weather the ongoing Omicron surge with only “short-lived” impacts, according to Federal Reserve Chair Jerome Powell
  • He says the US central bank is gearing up to begin tightening monetary policy despite the surge in COVID-19 cases as it scrambles to bring inflation under control
  • “The economy no longer needs or wants the very accommodative policies we have had in place,” Mr Powell says
  • He added that the tapering of Fed support is unlikely to impact the US jobs market as the country approaches full employment
  • Mr Powell’s comments were enough to soothe markets overnight, with the Dow Jones closing 0.51 per cent higher and the Nasdaq tacking on 1.41 per cent

The United States economy looks to be in a strong enough position to weather the ongoing Omicron surge with only “short-lived” impacts, according to Federal Reserve Chair Jerome Powell.

Mr Powell said in a congressional hearing on Tuesday that the US central bank was gearing up to begin tightening monetary policy despite the surge in COVID-19 cases as it scrambles to bring inflation under control.

Last December, the Fed flagged three potential interest rate hikes for 2022 in light of surging inflation and the US economy nearing full employment.

This week, Mr Powell said the bank was determined to ensure that this high inflation did not become “entrenched”.

“The economy no longer needs or wants the very accommodative policies we have had in place,” he said.

He added that the tapering of Fed support would be unlikely to have a negative impact on the employment market.

In fact, he said the jobs market needed inflation to be under control because “you’re not going to have maximum employment without price stability”.

A contentious talking point for the Federal Reserve has been its misdiagnosis of high inflation last year as being “transitory”. Essentially, the central bank predicted — quite wrongly — that elevated prices would be short-lived.

In his congressional address, Mr Powell said the bank mistakenly expected global supply chains to begin catching up to demand quickly, which is why the Fed gave no response to rising inflation last year.

He maintained that global supply chains were still expected to start to catch up with demand, but the bank stood ready to tighten borrowing costs as needed to see inflation begin to ease by mid-2022.

Mr Powell’s comments were enough to soothe markets overnight, with the Dow Jones reversing an early-session tumble to close 0.51 per cent higher. Similarly, the Nasdaq tacked on 1.41 per cent.

Of course, what Mr Powell didn’t say was also important: the Fed Chair didn’t back a fourth rate hike in 2022 and did not comment on when the bank might begin to raise interest rates. Many analysts are expecting March to signify the start of the interest rates lift-off, but this has not been confirmed by the Fed.

Mr Powell also did not specify a timeframe for when the central bank might begin a planned balance sheet run-off, but he said this would likely happen “sooner and faster” than it did during the 2007-2009 recession.

Australian investors have followed in the stride of their US counterparts today, with the ASX 200 rising 0.62 per cent and touching 7435 points just before market close.

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