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Powell signals Fed tapering may speed up despite Omicron fears

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Fed Chair Powell told Congress that the Federal Reserve may speed up its taper policy. Yahoo Finance's Brian Cheung provides details.

Video transcript

[MUSIC PLAYING]

- You have been watching the testimony of Fed Chair Jerome Powell and Treasury Secretary Janet Yellen testifying before the Senate Banking Committee-- well over two hours here, certainly a lot of ground covered. And as we've been watching this, we saw the markets accelerate their losses here. The Dow coming back off of the lows of the session but still down roughly 600 points. Certainly investors watching this one closely, concerned about those comments coming from the Fed Chair, saying the Fed will, in fact, discuss bond-- speeding up bond buying tapering at the meeting next month, potentially accelerating that tapering by a few months. I want to bring in Yahoo Finance's Brian Cheung, who has been watching this alongside us as well. And, Brian, we have seen bond yields move lower on the back of this as well, certainly some also good insight here on how the Fed Chair is watching concerns around the new Omicron variant and what exactly the economic impact could be from that.

BRIAN CHEUNG: Yeah, certainly. And it was interesting because headed into the holiday last week there were questions about how much attention will be paid to this hearing, which was scheduled as part of the semi-annual CARES Act testimony. So this isn't necessarily part of Chairman Powell's renomination hearing. That will be a separate event that happens presumably sometime before maybe the new year or at the beginning of the new year. So this is really just, kind of, the focal point of, kind of, all this news chatter that we've heard about the Omicron variant since it was officially identified last Friday. That accentuated the market sensitivity to what we got over the last few hours from both the Fed chairman and also the Treasury Secretary Janet Yellen.

But a lot of this concerns what the Federal Reserve is trying to do with regards to its taper program. Keep in mind that the beginning of this month the Federal Reserve had said that it was going to begin the process of slowing its $120 billion a month pace of asset purchases. That's going to happen at a pace of about $15 billion per month. But there was chatter before everyone had turkey last week about maybe accelerating that process. Of course, with the Omicron variant, questions about whether or not the Fed wanted to speed that up or wanted to defer to maybe putting that at bay because of the downside risks of what that could do to the economy-- what we heard from the Fed chairman is that very much is still on the table. Take a listen to what he told the Senate Banking Committee just an hour ago.

JEROME POWELL: At this point, the economy is very strong, and inflationary pressures are high, and it is, therefore, appropriate, in my view, to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner. And I expect that we will discuss that at our upcoming meeting in a couple of weeks. Of course, between now and then we will see another labor market report, another inflation report, and we'll also get a better sense of the new COVID variant as well before that-- before we make that decision.

BRIAN CHEUNG: It's important to note here that the Fed chairman wasn't necessarily saying we are going to speed up the taper just merely that they're going to have that discussion. But, of course, why would he ever bring that talking point up if it wasn't under serious deliberation. And for what it's worth, we've seen markets react to this, of course, as you mentioned, Akiko, the Dow being down by as much as 600 points-- see the 10-year falling by as much as eight basis points.

But consider the notes that I've just received in my email inbox since the last hour where you have Evercore ISI noting, quote, "The tone of Powell's remarks was notably hawkish, suggesting that the Fed's primary focus is on the risk of more persistent excess inflation." You have Fitch's chief economist saying this does sound like a significant change of tone from Powell. So it seems like the market interpretation of all this is that it's very much likely going to be the case that the Fed accelerates that taper in its meeting, which by the way, is going to be December 14 and December 15. Of course, between now and then, we're going to get another employment report, that's going to happen on Friday, in addition to more [INAUDIBLE] on inflation. So very much a lot of data points that could happen between now and then, but the Fed setting the table, if you will, for a possible acceleration of that taper. Akiko, Zach?

- And, Brian, Secretary Yellen also being asked a lot about the debt levels. Of course, you know, we're talking so much about the variant, but we're just a few days out from, you know, the congressional discussion here about whether, in fact, they should raise the debt limit because that was, kind of, delayed by a few months. I mean, what stood out to you in the questioning there and particularly what we heard from the Treasury Secretary today.

BRIAN CHEUNG: Yeah, well, it's funny because we were remembering this whole debate. It seems like deja vu because it literally was back in October when the federal-- or, rather, when the federal government had been at risk of possibly, you know, not being able to pay its bills, which could have affected it's creditworthiness and possibly risk a default. But, of course, there was that agreement from Congress to kick the can down the line to December, but here we are at the last day of November. That conversation very much heating up again.

So the big question here is really going to be whether or not this debate here, especially as it appears the administration is still grappling with the political problems and getting the Build Back Better bill across the finish line-- whether or not that's going to get wrapped into a possible conflation of also not having an agreement to extend the Treasury's ability to issue new debt to pay its bills. Again, that debt sealing caps the amount that the Treasury can issue in terms of new government debt in the form of US treasuries. Janet Yellen very clearly saying in this hearing that it would be catastrophic for the federal government to not meet its obligations, which could affect the government's creditworthiness.

Now, of course, that hasn't necessarily happened in history. The United States has not defaulted in modern history. But Janet Yellen really trying to underscore-- you have-- you will have to raise the debt ceiling, hopefully, on a permanent basis to make sure that you don't put the US government in that position. Of course, you have Republicans that are arguing, hey, you have a Senate that is actually run by the Democrats, it's a 50-50 split, but the Vice President Kamala Harris is the tiebreaker, why don't you just get this across the finish line here? But, of course, as we saw in October the political drama is very much tied very closely to the infrastructure spend and the longer term spend that the Biden administration is trying to get across the finish line. So this political football very much still going to be in play over the coming weeks.

- Yeah, well, in the coming days, especially with December 3 just looming there. Brian Cheung, appreciate you staying on top of this for--

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