Jerome H. Powell, the Federal Reserve chair, has compared setting monetary policy to stumbling through an unlit room: You feel your way to the door cautiously to avoid making a painful mistake.
The analogy is likely to ring especially true after the Omicron-jumbled job report for January, as the virus obscures the pace of progress in the job market and leaves policymakers in the dark. But the Fed may lack the luxury of creeping slowly through the dinginess this time.
Mr. Powell and his colleagues are poised to raise interest rates for the first time since 2018 in March, a move meant to cool off the economy as inflation runs at its fastest pace in nearly 40 years. It will likely be in the uncomfortable position of making that move — and signaling what comes next, as markets are pointing to as many as five 2022 rate increases — at a time when the latest job market data look lackluster at best, bleak at worst.
The Fed will look past a few months of virus-depressed job market data as officials try to assess the actual strength of the economic rebound: The Omicron variant is already in retreat in the United States, and there’s little reason to expect an extended lull in hiring after a year of breakneck labor market progress.
But the virus flare-up and its economic repercussions underline a challenge that is likely to confront the Fed throughout 2022 as it pares back its support. It’s hard to know what will happen next in a coronavirus-stricken business environment.
“We’ll be humble and nimble,” Mr. Powell pledged of the central bank’s policy path, speaking at a news conference last month.
The Fed typically navigates by watching incoming labor market data — especially the unemployment rate, lately — and inflation data.
But it could take a few months for the jobs picture to clear, and in the meantime, inflation is running hot. Used-vehicle prices, which have been a big driver of overall price increases, might be on the cusp of stabilizing but have yet to cool off notably. Gasoline prices are headed back up, food is costing more and rents have been increasing steeply.
That is likely to leave the Fed, which typically takes away its help at moments of strong labor market progress, moving when the job market is hitting a bump.
“It’s the Omicron fog,” said Diane Swonk, chief economist for the accounting firm Grant Thornton. “It’s not going to give us visibility.”
Fed officials are trying to make sure that they do not fall behind the curve on high inflation, allowing it to become so locked into consumer and business expectations that it becomes a permanent feature of the economic landscape.
How the Fed strikes the balance — and how much it slows down the economy with its rate increases this year — could have important political implications, too. Voters are already glum about the economy’s prospects, and President Biden is suffering in the polls.