Fed officials say rising supply chain risks fuel concern of more persistent inflation
By Howard Schneider
WASHINGTON, May 6 (Reuters) – The ongoing U.S.-backed war with Iran, coupled with ongoing high oil prices and mounting problems with global supply chains, raises the risk of a sustained inflation shock, Federal Reserve officials said on Wednesday.
Chicago Fed President Austan Goolsbee said shortly after the conflict began on Feb. 28 that business executives told him that a brief increase in oil prices would be fine, but “if we’re going to have really high oil prices for months, they’re going to start to feel some pretty intense pressures on the supply chain.”
“You’re starting to see some of these issues developing,” Goolsbee said in a video call with reporters after attending the Milken Institute conference in Los Angeles. “The longer this goes on, the more you’re going to have these problems because they’re depleting the input stocks they have for industrial chemicals and other inputs whose distribution is disrupted,” and persistently high fuel prices are reflected in transportation and other costs.
While there was initial concern that the war would hurt U.S. job growth and demand while also causing prices to rise, “There hasn’t been a stagflationary shock yet,” Goolsbee said. “This was just an inflationary shock. And the longer this goes on, the more nervous that makes me.”
With inflation about a percentage point above the Fed’s 2% target and expectations that it could rise further, investors see little chance of the US central bank cutting interest rates for perhaps a year or more.
Speaking separately, St. St. Louis Fed President Alberto Musalem said risks to monetary policy are shifting toward higher inflation, likely requiring interest rates to remain steady “for a while,” perhaps even rising.
In his comments at the Mississippi Bankers Association event held in Fairhope, Alabama, Musalem said, “Inflation is significantly above our target.” “We have risks on both the employment and inflation side. In my opinion, the risks are shifting towards the inflation side.” This adds weight to the expectations that the Fed will at least keep the policy rate constant.
While there are “plausible scenarios” in which the Fed could lower interest rates if demand slows and the unemployment rate rises, Musalem said the same goes for the central bank likely increasing borrowing costs at this point.
