Howard Schneider and William Schomberg

(Reuters) – Major central banks will meet this week in order to evaluate the risks posed by the Omicron coronavirus variant. They also consider reducing the emergency measures that were put into place almost two years ago as a way to combat the economic impact of the pandemic.

The Global Balancing Act begins Tuesday with the Federal Reserve meeting for its two-day latest meeting. This includes new monetary policies statements by the U.S. central banking on Wednesday, European Central Bank and Bank of England on Thursday, as well as the Bank of Japan and Bank of Japan respectively on Friday.

Each face the exact same problem – the question of whether inflation protection and the end of central bank asset purchase era are more important than economic threats posed by this new version. However, their differing approaches can make it a turbulent year.

There is a sharp division over the way central banks will manage the following stage of pandemic. This contrasts with the massive and coordinated support that was approved in 2020 at the beginning of the crisis.

While the Bank of England seemed to be poised for raising interest rates, in an apparent nod towards high inflation, Omicron has quickly spread across the nation and has imposed new restrictions on policymakers. In a nod to the still-determinative role of Omicron, the Bank of England is expected to maintain their borrowing costs policy at its meeting this week.

Michael Saunders is one of the Bank of England’s policymakers. In November, he voted to increase the rate. However, he stated that it could have advantages for the Bank of England to wait until there was more evidence regarding Omicron’s potential effects on economic performance and public health. The risks that the Omicron variant poses to the U.K. have increased since then.

The ECB will likely continue and possibly the Bank of Japan may begin, reducing pandemic bond purchase at the margin. These tentative steps reflect lower inflation and more enlightening economic rebounds in Japan and the euro area. Both interest rate hikes are unlikely to occur.

The ECB must be aware of major differences within the bloc, which is why it decides policy. A major retreat from support in times of crisis could have unintended consequences for sustainability of high-debt loads such as Italy’s.

Japan has not seen the global inflation wave that continues to ravage other regions of the world. Therefore, the only thing under discussion is a small reduction in corporate asset acquisitions.

The Fed is expected to continue a policy shift, which could become even more intense over the next year. This is arguably the most risky scenario for a surprise.

Inflation is already at twice the official target of 2% and has been so persistent that U.S. policymakers are abandoning their label of it being “transitory”. Although the U.S. labor force is still far below its peak pre-pandemic, rising wages and a low unemployment rate may indicate that there are more jobs available. (Graphic: Inflation, on average Inflation, on average, https://graphics.reuters.com/USA-FED/FRAMEWORK/byvrjjmbkve/chart.png)

CONFRONTING WITH THE UNKNOWN

Two years after a global economic pandemic, there is still uncertainty. The fate of financial markets depends on issues that seem local, such as whether people start looking for work in the United States. Gian Maria MilesiFerretti, former deputy head in the research division of the International Monetary Fund, and currently a senior fellow at Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy, stated:

He said that if the U.S. labor force participation is not increasing and policymakers believe they have reached full employment, it could be possible for the Fed to tighten faster than expected. This would disrupt world asset markets, and fall particularly hard on countries in need of rising dollar costs. (Graphic: Lots of fuel, but no lift-off, https://graphics.reuters.com/USA-ECONOMY/RECESSIONTEMPLATE/zgvomrgoxvd/chart.png)

This week, the Fed is likely to accelerate the end of monthly Treasuries purchases and mortgage-backed security securities. The goal is for the bond-buying program to be completed by March rather than June. However, this decision might be less telling than the Fed’s recent policy statement, which describes U.S. inflation, the changes made by officials to their economic forecasts, or the tone Fed Chair Jerome Powell uses at his post-meeting conference.

He faces the same unanswered questions as his fellow Fed officials: Will this new version further cut global supply chains or boost inflation? A new recession could lead to the destruction of consumer spending, and loss of jobs. Is it all of these? Oder will they have very little economic impact?

Investors already expect the Fed to approve three 0.25-percentage-point rate increases in 2022. These bets are only increasing since Omicron’s identification last month. It is clear that politics and economics of higher U.S. inflation weigh more now than any perceived economic risks from a new epidemic.

Fed officials did not agree on whether a rate rise would be necessary next year at the September meeting. Analysts say that officials must now catch up in terms of their economic outlook as well as the expected path for interest rates, with unemployment rising faster than anticipated and inflation running higher than predicted at September’s meeting.

Jay Bryson chief economist at Fed, stated, “Obviously Omicron throws uncertainty” in the Fed’s calculations. Wells Fargo (NYSE:). Bryson expects inflation to ease in the middle of 2022, allowing the Fed to wait until the second half of the year to raise its benchmark overnight interest rate and to finish the year with only two 0.25-percentage-point rate hikes under its belt.

Bryson stated that “if we’re wrong, the Fed must step up” and “if they move very fast, then you have a policy error.” (Graphic: A bumpy landing?, https://graphics.reuters.com/USA-ECONOMY/RECESSIONTEMPLATE/egpbkoolgvq/chart.png)