Why the supply chain crisis is an inflationary 'wild card' for the Fed
The supply-chain problems of 2021 are expected to continue well into the new year while potentially contributing to inflation, which is still white hot.
Challenges in getting goods from factories to consumers, along with strong consumer demand, has driven up prices across items like apparel, groceries and appliances. Those gains pushed up December's headline inflation at the fastest rate since 1982, with price pressures converging with the spread of the Omicron variant to slow down operations — and stretch staffing to their limits in key sectors.
Combined with supply shortages, inflation "one of the big wild cards,” Jack Janasiewicz, Natixis Global Asset Management Portfolio Strategist, told Yahoo Finance Live on Tuesday.
Port bottlenecks are one element that the Federal Reserve is watching closely in order to determine next steps on monetary policy. According to Janasiewicz, Fed policymakers might be looking to see if easing supply chain woes can "buy them time" on hiking rates aggressively and reducing their balance sheet — especially if shortages and spiking prices can normalize in the near-term.
At a hearing on Tuesday, Fed Chairman Jerome Powell disputed the Biden administration’s claim that supply-chain problems have eased. He told Congress that persistent bottlenecks are responsible for the record-high inflation, which could prompt the central bank to raise interest rates sooner than planned.
“The supply side constraints have been very persistent and very durable. We're not really seeing a lot of progress,” Jerome Powell said in a Senate Banking Committee hearing.
Janasiewicz expects the Fed to hold off "a bit" as the central bank winds down its stimulative bond buying program. which it may complete by March.
“I think they expect that if COVID starts to become under control, as things start to normalize that supply side of the demand supply and balance maybe starts to loosen up and we'll start to see some of those inflation prints ease up a bit," the strategist said.
"And that's, again, part of that thesis where I think they're trying to buy a little bit of time for the second half of the year,” he added.
Dozens of cargo ships have been anchored offshore from the ports of L.A. and Long Beach for months, leading to a supply chain crisis nationwide. U.S. Transportation Secretary Pete Buttigieg visited the twin ports this week to discuss efforts to address the bottlenecks gripping the facilities for more than a year.
Meanwhile, ships remain backlogged in the Pacific. A total of 103 vessels are backed up at West Coast hubs, the Marine Exchange reported this week. The figure includes 89 ships that are loitering farther out at sea or slow speed steaming toward the twin ports.
Despite some predictions that supply chain woes would disappear, Powell said this week that stalled shipping and the constraints on goods is hurting the economy, which is contributing to the consumer price increases.
“This is a situation where there actually are hard constraints. People want to buy cars, car makers can't make any more cars because there are no semiconductors – that's never happened,” Powell said.
Meanwhile, China continues to carry out lockdown measures to keep the variant out, suggesting that more supply chain disruptions could be coming in the next few weeks.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter: @daniromerotv
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