First thoughts on Omicron impact

With cases of the new Omicron variant being reported on several continents now, there is a good chance that it is already present in the United States. We still know almost nothing definitive about whether Omicron is more transmissible or deadly than other coronavirus variants, but it adds to the downside risks, which were already on the rise with the winter surge in infections in the Northeast and the Midwest. Under those circumstances, we think it is unlikely that the Fed will accelerate the pace of its QE taper at this month’s FOMC meeting, which could have paved the way for interest rate hikes earlier next year. There is some debate about whether Omicron will add to inflationary pressure if it affects supply more than demand, but the collapse in energy prices suggest that, initially at least, the impact will be strongly disinflationary.