The Fed’s high-wire act just got even more perilous

By Julia Horowitz, CNN Business

Investors were spooked by the discovery of the new Omicron variant of the coronavirus. Now, they’re contending with another wrinkle in the outlook: The Federal Reserve could be prepared to roll back stimulus measures faster than planned because of persistent inflation.

What’s happening: Stocks fell sharply on Tuesday after Fed Chair Jerome Powell told Congress that plans to taper asset purchases by $15 billion each month may no longer be appropriate, and the central bank may need to move quicker. The S&P 500 and Dow both closed down 1.9%, while the Nasdaq Composite finished the day 1.6% lower.

In a note to clients, strategists at UBS laid out the current situation this way: “Omicron + taper = volatility.”

The Fed already had an incredibly difficult job on its hands. Its preferred measure of inflation, released last week, showed consumer prices climbing at the fastest pace in three decades.

The central bank has said it will start rolling back crisis-era measures to keep the economy from running too hot — though it doesn’t want to jeopardize the recovery in the US job market, where unemployment still sits at 4.6%. Before the pandemic, the unemployment rate was at 3.5%.

The arrival of the Omicron variant has made assessing the situation even harder. While scientists are rushing to determine whether the strain is more transmissible and if vaccines remain effective in protecting against severe disease, economists worry that it could cause more people to stay home or even force the closure of some venues again. That would hurt the jobs comeback.

Powell sounded hawkish on Tuesday despite this development. Goldman Sachs’ team notes that Powell “stated three times, with increasing firmness, that it would be appropriate to discuss accelerating the pace of tapering.”

“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 … perhaps a few months sooner,” Powell said.

Breaking it down: The pivot says something about the Fed’s assessment of inflation. Powell had maintained it was “transitory,” and would pass when pandemic pressures on supply chains eased. But on Tuesday, he said it was time to move away from use of the word.

“Ultimately, the transitory view on inflation has officially come to an end as Powell’s comments reinforced the notion that elevated prices are likely to persist well into next year,” said Charlie Ripley, senior investment strategist for Allianz Investment Management.

The Fed’s ability to fight inflation without spooking markets — which have become accustomed to easy money — was always going to be a challenge. Powell just indicated that, in his view, the task is increasingly urgent.

Throw the effects of the Omicron variant into the mix, and it looks even trickier.

“The problem now is that such a late wake-up to the reality of inflation increases the risks of mismanaging its policy catch-up process,” economist Mohamed El-Erian, who has argued the Fed has been too slow to acknowledge inflation, wrote in a column for Bloomberg.

He continued: “Such a policy mistake — were it to materialize — would add to the woes of an economy in which the more vulnerable segments of the population are already having to cope with inflation taking a big bite out of their income, and where too many Americans have been priced out of the housing market. This is all particularly unfortunate and was entirely avoidable.”

China could close the IPO loophole loved by tech giants

For years, China’s biggest tech companies have taken advantage of a loophole that allowed them to raise money from foreign investors.

Alibaba, Pinduoduo, Didi and JD.com have all made use of a structure called a variable interest entity, or VIE. Now, Beijing is reportedly planning to ban the practice as part of a push to boost data security.

Such a move could bar Chinese firms from listing on overseas stock markets and potentially force companies that have already gone down this route to overhaul their businesses.

The latest: Details remain in flux. But Bloomberg reports that China intends to block the practice as soon as this month, citing people familiar with the matter.

The consequences aren’t yet clear, but could be dramatic. Here’s how Bloomberg lays it out:

• Companies currently listed in the U.S. and Hong Kong that use VIEs would need to make adjustments so their ownership structures are more transparent in regulatory reviews, especially in sectors off limits for foreign investment, the people said. It’s unclear if that would mean a revamp of shareholders or, more drastically, a delisting of the most sensitive firms — moves that could revive fears of a decoupling between China and the U.S. in areas like technology.

The China Securities Regulatory Commission has not responded to a request for comment from CNN Business.

Watch this space: Shares of SoftBank plunged last week after Chinese regulators reportedly asked Didi to delist from the New York Stock Exchange because of concerns about data security. The Japanese company’s Vision Fund is a major shareholder in the Chinese ride-hailing service.

Should some of the biggest names in Chinese tech be compelled to leave foreign exchanges, it would be hugely disruptive for the investors that have piled into these stocks.

Travel is back, but Omicron could change everything

Just when US airlines thought they were on the verge of profitability again, along came the Omicron variant.

Leisure travel is back near pre-Covid levels, and this Thanksgiving marked the busiest week for air travel since the start of the pandemic. But major US airlines had been counting on a return of their most lucrative revenue sources: business and international passengers.

The emergence of the Omicron variant could put those travelers on hold, my CNN Business colleague Chris Isidore reports.

“I think the year-end holiday travel is booked and will go forward,” said Philip Baggaley, chief credit analyst for airlines at Standard & Poor’s. “But the plans for international travel and business travel, I would imagine there will be a wait-and-see attitude on those.”

Investors are fleeing airline stocks as a result. Delta Air Lines shares are down almost 9% since last Wednesday’s close, while United Airlines is nearly 10% lower.

They’re clawing back some of those losses in premarket trading this morning. But the outlook once again looks extremely uncertain.

“Unknowns by themselves are bad news,” Baggaley said.

Up next

CrowdStrike and Snowflake report results after US markets close.

Also today:

• The ISM Manufacturing Index for November posts at 10 a.m. ET.
• Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen testify before the House Financial Services Committee starting at 10 a.m. ET.

Coming tomorrow: Will US jobless claims stay near their lowest level since 1969?

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