By Howard Schneider
NASHVILLE, Tennessee (Reuters) – The COVID-19 pandemic’s crushing blow to global supply chains also scarred U.S. Federal Reserve officials who thought the fallout from disrupted ports and backed up container ships would cause only “transitory” inflation.
A strike by dockworkers on the U.S. East Coast and Gulf Coast that began on Tuesday isn’t expected to cause problems as deep or severe, but it still could cloud Fed policymakers’ views and their sense of certainty about what’s happening in the economy as they debate their next interest rate move ahead of the U.S. central bank’s Nov. 6-7 policy meeting.
“If it is short enough we will get through it,” David Altig, executive vice president and chief economic adviser at the Atlanta Fed, said on Sunday at a National Association for Business Economics conference in Nashville, Tennessee.
But he noted that one of the things helping hold inflation down right now is falling prices for goods, which could be at risk if the flow of imports stops for too long during the dockworkers’ strike.
“A reversal of those durable goods dynamics in terms of prices would not be a good thing, to say the least,” for central bankers counting on weak goods prices to keep overall inflation anchored, Altig said.
Ports from Maine to Texas were shuttered after the International Longshoremen’s Association called its first strike since 1977, putting thousands of workers on the picket line and stranding ships and containers at facilities central to the global economy. Many analysts expect the labor action to be short-lived, if only because the impact on commerce could be severe, putting pressure on both sides to reach agreement or, alternatively, for the White House to intervene.
It would likely take time for the issues flagged by Altig to become so pronounced they throw the Fed off track in its effort to return inflation to the central bank’s 2% target, a fight officials feel is nearly won. Many businesses, particularly retailers looking ahead to the holiday season, bulked up inventories in anticipation of the strike and may have the goods on hand to meet demand.
POTENTIAL DISTORTIONS
Even a two-week strike would cover the days during which government officials conduct the survey for the October U.S. jobs report, potentially distorting one of the last key bits of information Fed policymakers will receive before their November meeting. The count of payroll jobs could be depressed and the unemployment rate pushed higher if port-related businesses lay off workers, though the striking workers themselves are not counted as unemployed.
“For the Fed this is complicating. There is not an obvious policy implication. It can be as disruptive and demand-destroying as it can be inflationary,” with the potential to hit economic growth and consumer spending while also putting upward pressure on prices, Julia Coronado, president of MacroPolicy Perspectives, said on the sidelines of the NABE conference.
It may not matter for the November policy meeting and the likelihood that the Fed will cut rates by at least a quarter of a percentage point just days after the U.S. presidential election.
But “if this is something that is still going on in the first week of November … we might be feeling the constraints,” said Erin McLaughlin, a senior economist at the Conference Board. “We have all learned a lot about supply chains during the pandemic. It was not front of mind. Normal consumers are now aware,” and, she worries, may become more careful about spending if the strike persists.
“Would it change policy if wrapped up in a normal time frame? I suspect not,” former Cleveland Fed President Loretta Mester said in an interview at the NABE conference. But “you have to take it into account. If it is long-lasting it will have implications for prices, certainly … It might have implications for the labor market if people can’t get goods or there is a halt in activity.”