The Fed faces another dilemma, as a major strike may reignite inflation!

The heavy blow to the global supply chain caused by the COVID-19 pandemic has also surprised officials at the Federal Reserve. They originally thought that blocked ports and backed-up container ships would lead to "temporary" inflation.

The strike by dockworkers on the East Coast of the United States and along the Gulf of Mexico that began on Tuesday is not expected to cause such serious or severe problems. However, as discussions on the next interest rate moves before the Federal Reserve's policy meeting on November 6th to 7th, the strike may still impact the views of Federal Reserve policymakers and their certainty about the economic situation.

David Altig, Executive Vice President and Chief Economist of the Atlanta Fed, said at the National Association for Business Economics conference in Nashville, Tennessee last Sunday, "If the time is short enough, we will get through this difficulty."

But he pointed out that one factor currently helping to suppress inflation is the decline in commodity prices, and if the strike by dockworkers leads to prolonged import delays, this trend may be threatened.

Altig said that for central bank officials who rely on soft commodity prices to stabilize overall inflation, "a reversal in the trend of durable goods prices is at least not a good thing."

Following the first strike initiated by the International Longshoremen's Association since 1977, ports from Maine to Texas were closed, thousands of workers took to the streets to protest, and ships and containers were stranded in facilities crucial to the global economy. Many analysts expect this labor action to be short-lived, simply because the impact on business could be severe, leading to an agreement between both sides or pressure from the White House to intervene.

The issues pointed out by Altig may take some time to become so apparent that they pull the Federal Reserve off its track of efforts to bring inflation back to the 2% target, as officials believe this struggle is nearing victory. Many businesses, especially retailers preparing for the upcoming holiday season, have increased their inventories in advance and may have goods on hand to meet demand.

Even a two-week strike could cover the days when government officials conducted the October US employment report survey, potentially distorting one of the last important pieces of information received by Federal Reserve policymakers before the November meeting. If port-related companies lay off workers, it could depress wage employment numbers and push up the unemployment rate, even though striking workers themselves are not counted as unemployed.

Julia Coronado, President of MacroPolicy Perspectives, said during the NABE conference break, "This is complex for the Federal Reserve and does not have clear policy implications. It could be as disruptive as damaging demand and inflation, it could hit economic growth and consumer spending, while also putting upward pressure on prices."

For the November policy meeting and the likelihood that the Federal Reserve will cut interest rates by at least 25 basis points in the days following the election, this may be irrelevant Erin McLaughlin, Senior Economist at the Economic, Strategic, and Financial (ESF) Center of the World Federation of Major Enterprises, said, "But if the strike continues into early November, we may feel constraints. During the epidemic, we have all learned a lot about the supply chain. Ordinary consumers are now aware of this." And she is worried that if the strike continues, consumers may become even more cautious.

Former Cleveland Fed President Mester said in an interview at the NABE conference, "If it ends within a normal time frame, will it change policy? I doubt it," "But you have to consider this. If the strike lasts a long time, it will definitely have an impact on prices. If people cannot get goods or economic activities stop, it may have an impact on the labor market."