By Ann Saphir

(Reuters) -The Chair of the U.S. Federal Reserve, Jerome Powell, said Monday that he expects inflation to fall over the coming year, as demand and supply balance improve. However, he warned that COVID-19, a new strain, could muddy the outlook and cause prices to continue rising for much longer than previously thought.

Powell stated that while it is hard to know the effects and persistence of supply constraint, “it now appears that factors driving inflation upward will linger well into the next year,” in testimony prepared for Tuesday’s delivery at the U.S. Senate Banking Committee and published Monday by the Fed.

According to him, the economy will continue to expand and the labor markets to improve. This should lead to an increase in wages.

However, the rise in COVID-19-related cases as well as the appearance of Omicron could pose “downside risks to employment, economic activity, and increased uncertainty about inflation,” he stated. He also noted that people might be less willing to work in person due to health concerns, which could slow down progress in the labour market and increase supply chain disruptions.

This month, the Fed began to reduce its support of the economy by slowly decreasing asset purchases. The pace would be finished by June next year.

However, inflation is now more than twice the Fed’s target of 2%. Fed officials are increasingly open to speeding up taper in order to make way for interest rate increases earlier if necessary.

Powell didn’t mention the taper timeline, but he said the labor market still has “grounds to cover” for full employment. One of the conditions that the Fed set before considering raising interest rates is the possibility that they will not be as low as their present near-zero level.

Powell stated that the Fed “is committed towards our price stability goal” and would use its tools to both support the economy, the labor market, and “prevent higher inflation from becoming entrenched.”