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MNI INTERVIEW:Omicron Impact Likely Small-Dallas Fed Economist

MNI (Washington)

U.S. could near the natural rate of unemployment next year, according to the Dallas Fed's research director Marc Giannoni.

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The emergence of the Omicron variant of Covid-19 could represent a significant downside risk, but if the new variant is similar to others then the base case remains for robust U.S. growth upward of 4% next year, the Dallas Federal Reserve Bank's research director told MNI.

"The impact on the economy has become smaller and smaller with each subsequent wave" of Covid, said Marc Giannoni in an interview late Tuesday. "The overall impact on overall aggregate demand is going to be somewhat more subdued than has been the case in the past."

Giannoni sees above-trend growth next year and expects to see unemployment drop under 4% next year, with diminishing slack, though he stressed his outlook rests on the assumption that the new variant may be more transmissible but is not more deadly nor able to evade vaccine protection. Forecasters face a "black hole" of uncertainty before details and data are released on Omicron, he said.

"We might get data a few days from now that says it turns out to be a lot more lethal, in which case all bets are off," Giannoni said.


"The more likely scenario is that it delays all of these adjustments that should be taking place," he said, pointing to kinks in supply chains, disruptions to international trade, workers remaining on the sidelines and feeding wage pressures, and delays in the rotation of consumer spending from goods to services.

"While we see inflation coming down from the high levels of this year, we see inflation being somewhere between 2.5% and 3% next year," he said, declining to offer details about the interest rate assumptions baked into his outlook but pointing to the Fed's September Dot Plot showing the FOMC saw rates lifting off from zero in 2022.

Giannoni said he is not more worried about inflation than he was a couple of months ago, although the Dallas Fed has nudged up its 2022 PCE and trimmed mean inflation views by tenths of a percentage point. (See MNI INTERVIEW: US Trimmed Mean Inflation Headed To 2.5% In '22)

"In the sense that the numbers came out very elevated, they were not too different from what we were expecting," he said. "We are seeing now the broadening that we were expecting. Maybe it's coming a little faster than we were expecting and it's a little higher than we were expecting, but the picture overall has not dramatically changed so far."

And while Giannoni sees a fiscal drag next year that should reduce aggregate demand and ease some pressure on inflation, the over two trillion dollars in accumulated aggregate household savings should help maintain a healthy level of consumption going forward, also supporting employment growth.


"Here at the Dallas Fed we see the labor market as quite tight - in fact, depending on what measure you look at, as tight as it was pre-pandemic, if not more, in some cases," he said, comparing labor markets to 2019 and early 2020.

But whether the U.S. has reached full employment depends on which indicator you're looking at, he said.

"The employment-population ratio is still quite low, the participation rate is low," he said. But if the unemployment rate continues to drift down closer to 4.5% by year-end and under 4% next year, "you would be close to estimates of what would be the natural rate of unemployment."