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Powell tells the Senate that the Omicron variant poses a draw back threat to the financial system and complicates the inflation image

Federal Reserve Chairman Jerome Powell believes the Omicron variant of Covid-19 and a recent surge in coronavirus cases pose a threat to the U.S. economy and upset an already uncertain inflation outlook.

"The recent spike in COVID-19 cases and the advent of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation," Powell said in a statement he delivered to Senate lawmakers on Tuesday want. "Greater concern about the virus could reduce people's willingness to do personal work, slowing labor market progress and exacerbating supply chain disruptions."

Treasury Secretary Janet Yellen will testify with Powell on Tuesday before the Senate Banking Committee. The Fed chief and Treasury Secretary are required to report to Congress each calendar quarter under the March 2020 economic aid legislation that expands the central bank's emergency loan programs.

Powell's remarks were released by the central bank on Monday evening.

The Fed chief was also more direct on inflation, saying it was difficult to predict the persistence and impact of supply constraints, but it now appears that "factors driving inflation higher will last well into next year." ".

He pointed out that many forecasters, including some from the Fed, are predicting inflation will "drop significantly" over the next year as bloated supply chains overtake cooling demand for goods.

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Powell's remarks came just days after fears about a new variant of Covid caused investors to drop US stocks and lower their expectations of future Fed rate hikes. The Dow Jones Industrial Average lost 900 points, or 2.5%, on Friday and hit its worst session of the year on the last trading day of the week. The markets recovered somewhat on Monday.

Concerns about the prevalence and potential impact of the Omicron coronavirus variant prompted traders on Friday to turn to the relative safety of government bonds and downgrade their forecast for future Fed rate hikes.

Last week, about 25% of investors said the Fed would still have rates near zero in June 2022, while the other 75% are betting that the central bank would have hiked at least once by then, according to the CME Group's FedWatch tool. That spread has narrowed since then, thanks in part to the new variant, with around 35% of investors now betting that the Fed will still have rates close to zero in June 2022.

The benchmark ten-year government bond yield fell 15 basis points to 1.49% on Friday before climbing back above 1.5% on Monday. Bond yields fall when their prices rise.

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