According to Cleveland Federal Reserve Bank President Loretta Mester, the Omicron coronavirus variant threatens to drive soaring inflation in the US by further pressuring supply chains and increasing labour shortages.

"If it turns out to be a bad variant," Mester said, "it might exacerbate the upward pricing pressures we've seen from supply-chain issues."

"Fear of the virus is still one of the causes preventing people from returning to work," Mester said, adding that if the new variant was more virulent than Delta, those who had lost or quit their jobs during the pandemic would continue to stay at home.

Fed's Mester says she would still like to begin taper this year | Reuters

Federal Reserve Chair Jerome Powell warned earlier this week that the US central bank must be prepared to respond if inflation does not fall in the second half of next year as most experts predict.

"We have to consider the possibility that those persistently high inflation statistics may become more embedded," Mester said. "It's essentially about giving us the optionality to make interest rate changes."

Mester went on to say that she would support at least one rate hike next year, and that two may be "appropriate."

Still, she noted that the economy is getting better at dealing with these variants, adding that demand side effects have eased but supply side effects have not.

In 2022, Mester will be a member of the Fed's policy-making committee.