Federal Reserve Chairman Jerome Powell said on Friday that Americans should be prepared for the global supply chain to remain in crisis until 2022 – and that the central bank is preparing to face the challenges that lie ahead. flow for the US economy.
Speaking at a centenary conference of the Bank for International Settlements and the South African Reserve Bank, Powell warned that “supply side constraints have worsened” during the pandemic, while that the supply chain and economic risks are “clearly now longer and longer – persistent bottlenecks, and therefore higher inflation.
Already, these bottlenecks have slowed international trade at a breakneck pace, as shipping containers loaded with goods wait to be unloaded and experts advise starting holiday shopping early.
In addition to packages that take longer to arrive, consumers are also likely to feel the resulting inflation: September, as German Lopez of Vox explained.
However, Americans’ appetite for food has not diminished. After a brief drop at the start of the pandemic, people embraced both e-commerce and brick-and-mortar retailing as pandemic restrictions relaxed. It is good for an economy bombarded by Covid-19, but it also created its own set of challenges in the form of a safeguarded supply chain that was not designed to withstand a pandemic, and to accompany the inflation while people supported by an economic recovery continue spending.
As Secretary of the Treasury Janet Yellen told CNN on Sunday, it will probably not be a permanent problem: she expects “an improvement by the middle to the end of â, And pointed out that monthly inflation rates have already been falling since the start of this year.
For now, however, the Fed has a few steps it can take to dampen inflation, both in the short and long term. In the immediate term, as Powell said in September and reiterated on Friday, the central bank will likely begin the process of ‘tapering off’ or cutting back on its purchases of government assets such as Treasuries and backed securities. to mortgage claims. The Federal Reserve is spending about $ 120 billion per month on these assets to help fill government coffers and fund the trillions of stimulus spending, which has helped keep U.S. markets afloat during the pandemic.
Strong demand, represented in part by inflation and made visible by the current tightening of the supply chain, signals to the Fed that its stimulus purchases are having the intended effect and will not be needed any longer, and that it’s prudent to reduce them gradually – probably to around $ 15 billion a month starting in November.
It could also alleviate supply chain problems by decreasing demand.
In the long run, the Fed could also raise interest rates, which limits the amount of money in circulation, thus lowering demand and hence inflation. But that’s on the back burner for now, Powell said on Friday, as the Fed watches and waits to see if inflation slows down and the labor market regains strength.
However, Powell and the Fed are responding to concerns about inflation, however, they will not be able to mend the broken global supply chain on their own – part of the reason inflation is so high in the first place. -.
The supply chain was already strained; The Covid-19 pushed him to the breaking point
As Powell said on Friday, inflation is being driven by strong demand that is straining a supply chain that was in trouble even before the pandemic. But the global Covid-19 onslaught has toppled that particular house of cards, and a healthy supply chain is still a long way off.
In the real world, the supply chain has been disrupted at virtually every level, from factories producing goods to ports where they are supposed to be unloaded and sent to store shelves, as Vox’s Sean Rameswaram explained on Today explained Last week.
From the manufacturing level, many companies operate on the âon demandâ principle; they tend to only manufacture what is expected to meet demand, as storing excess product during a supply chain or other crisis means manufacturers are spending more money on storage facilities – that they cannot then spend elsewhere, including in “bonuses for the executives”. or dividends for shareholders, âas Peter Goodman of the New York Times points out.
But during the pandemic, closed or understaffed factories couldn’t produce what people needed, and big manufacturers didn’t have stockpiles of supplies because they weren’t designed to operate that way – that is. which means that items like toilet paper and hand sanitizer were missing in the grocery store shelves.
Industry consolidation also contributes to supply chain bottlenecks; if a single company produces computer chips, for example, there are no alternatives to rely on when the chip factory is closed, as many factories have been in different stages of the pandemic and continue to be in countries with low vaccination rates.
When manufacturing plants, especially China, were able to manufacture and ship necessary equipment like PPE, these products were shipped in large containers to many places that usually do not export goods to China. Thus, shipping containers full of PPE sent to places like countries in Southeast Asia and Africa could not easily justify a return trip. Today, a global shortage – or indeed, poor placement – of shipping containers has driven up the cost of shipping goods by tens of thousands of dollars, which in turn is passed on to the consumer. A shortage of truckers to deliver goods by land also contributed to the crisis.
There has also been a labor shortage as people get sick or have to care for sick parents, juggle childcare and work, or, naturally, refuse to work for low wages in low-paid jobs. unsatisfactory conditions during a pandemic.
In the United States, vaccinations help tackle one side of the problem; people can safely return to work, and out-of-home child care is becoming increasingly available as schools and daycares reopen. Vaccination warrants have helped improve workplace safety, but widespread strikes and resignations over the general state of labor in America are also contributing to the supply chain crisis and don’t seem to end anytime soon.
All of this leads to an astonishing save at ports on both coasts, with cargo ships anchored off the coasts of Savannah and Los Angeles, sometimes for days on end, as ports scramble to store and ship all cargo – otherwise known. under the name of commodities that Americans buy. .
And now that global manufacturing is back – as is demand – the system is in shambles, writes Recode’s Rebecca Heilweil:
Global manufacturing has been operating at full capacity for over a year. But without any wiggle room to deal with labor shortages, bottlenecks and delays, the problems just keep piling up. These problems have now reached critical mass. So even though American consumers have started ordering many more products, there is no flexibility in the supply chain to meet this demand.
How American consumerism is breaking the supply chain
Since the supply chain is a complex organism with many distinct parts, experts agree that there will be no return to normal anytime soon.
The Director General of the World Trade Organization, Ngozi Okonjo-Iweala, predicted last week at the Financial Times summit in Africa that the crisis could last “several months” because of the “mismatch between supply and demand. â, Which should be exacerbated by the next vacation. in many parts of the world.
But it’s more important than Christmas shopping: As Atlantic’s Amanda Mull writes, it’s about rethinking our lifestyles as American consumers and how our ability and desire to buy affects the market. rest of the world.
If Americans backed by stimulus checks and discretionary spending geared more to goods than experiences “might just fail,” says Mull – “that” being to buy things we don’t really need or that we don’t want – that would give a global supply chain stretching beyond its limits time to readjust.
Will this magically solve the interdependent and logistically complicated machine that is the global supply chain? No, but reducing the disproportionate demand for a limited supply of goods could reduce both supply chain tension and inflation.
As Vox’s Terry Nguyen wrote earlier this week, Americans aren’t completely at the mercy of targeted Instagram ads or Amazon deals, as far as it sounds. Often times, the motivation to buy is not based on need, but on our feelings – such as boredom, sadness, or insecurity. These purchases have repercussions not only on the economy, but also on the environment and on labor practices throughout the supply chain.
While it isn’t overwhelming to decide not to buy another striped sweater, game console, or flat screen TV – it won’t solve climate change or provide better terms or better wages. to overworked and underpaid workers – it’s always a step towards some pressure out of the broken supply chain.