Federal Reserve officials have for months blamed a dwindling supply of US workers for elevated inflation levels. During his December press conference, Fed Chair Jerome Powell said that Covid-related deaths accounted for a large chunk of the structural labor shortage in the economy.
That's why some economists and health care advocates were surprised on Wednesday when central bankers decided to no longer list public health readings among the data points they'll consider in assessing economic conditions and prescribing monetary policy changes going forward.
What's happening: During his February press conference, Powell, who tested positive for Covid just last month, clarified the Fed's reasoning.
"I personally understand well that Covid is still out there but that it's no longer playing an important role in our economy," he said. "It doesn't really need to be in the Fed's post-meeting statement as an ongoing economic risk, as opposed to a health issue."
It's true that the United States has largely moved on from the deep economic downturn triggered by early-Covid business closures and stay-at-home advisories which led the Fed to cut interest rates and purchase massive amounts of debt securities to help incentivize financial markets and spending.
But it's premature to say that Covid is no longer an economic issue when long Covid has such a significant effect on America's workforce, economists and health care officials say.
Long Covid, which stems from a Covid-19 infection, is considered a chronic illness that is sometimes debilitating. As many as 30% of Americans, about 23 million people, develop long Covid after a Covid infection, said the US Department of Health and Human Services in November.
"The bottom line is that long Covid is why the labor force participation rate has not recovered to pre-pandemic levels, even in a situation with solid wage growth," wrote Torsten Slok, chief economist and partner at Apollo Global Management, in a recent note.
"These 'missing' workers are why companies continue to report labor shortages and why wage inflation remains so high," said Slok. "This continues to be a challenge for the Fed as the FOMC [Federal Open Market Committee] tries to get inflation quickly back to the Fed's 2% inflation target."
Fed officials have expressed concern that a root cause of inflation growth is our low labor participation rate and the imbalance of worker supply and demand which leads to an increase in wages and higher prices.
A new analysis of workers' compensation claims in New York State found that around 18% of long Covid patients still hadn't returned to work more than a year after contracting the virus. More than three quarters of them were under 60.
"Long Covid has harmed the workforce," said the report, compiled by the New York State Insurance Fund. These findings, "highlight long Covid as an underappreciated yet important reason for the many unfilled jobs and declining labor participation rate in the economy, and they presage a possible reduction in productivity as employers feel the strains of an increasingly sick workforce."
Another academic study found that about 7% of US adults, or 19 million people, still suffer from long Covid.
Caregiving for those suffering from Covid or long Covid is also affecting the labor imbalance, said Giacomo Santangelo, an economics professor at Fordham University.
If families don't have the ability to hire home health care workers, then people will be forced to leave their jobs and become caregivers, he said. The effect of taking time off of work for caregiving, he said, "is something we should expect to see putting stress on the labor market going into the future."
The bottom line: "Ultimately long covid is a key reason why the Fed will have to keep the Fed funds rate elevated for an extended period," said Slok.
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