Officials at the U.S. Federal Reserve were also shocked by the COVID-19 pandemic, which has caused a massive disruption to global supply chains. They thought that the impact of backed-up container ships and disrupted ports would only cause "temporary" inflation.

The dockworker strike that began Tuesday on the U.S. East Coast, and Gulf Coast is not expected to have a severe impact on the economy. However, it could still cloud Fed policymakers’ views and their confidence about the state of the economy when they discuss their next interest rate decision ahead of the U.S. Central Bank's policy meeting on Nov. 6 and 7.

David Altig said, "If the time is short, we'll get through it" on Sunday, at a National Association for Business Economics Conference in Nashville, Tennessee.

He noted that falling prices of goods are helping to keep inflation low right now. This could be threatened if imports were stopped for too long due to the dockworkers strike.

Altig stated that a reversal in the durable goods price dynamics would be "not a good thing" for central bankers who rely on low goods prices to anchor overall inflation.

The International Longshoremen's Association, which has been in existence since 1977 called for its first strike. This led to ports from Maine to Texas being closed and thousands of workers joining the picket lines. Containers and ships were also stranded at key facilities that are vital to the global economic system. Analysts expect that the strike will be short-lived because of the potential impact on the global economy. This could put pressure on both parties to come to an agreement, or alternatively, the White House may intervene.

Officials believe that the Fed is close to winning the fight to bring inflation back to its 2% target. Businesses, especially retailers, who are looking forward to the holiday shopping season, may have stocked up in anticipation of the strikes and will be able to meet the demand.

Potential Distortions

A two-week strike could cover the days when government officials are conducting the survey for the U.S. October jobs report. This could distort one of the final key pieces of information that Fed policymakers receive before their meeting in November. If port-related businesses fire workers, the number of payroll jobs may be depressed. The unemployment rate could also increase.

This is a complex situation for the Fed. It is difficult to see the policy implications. It can be just as disruptive, demand-destroying, and inflationary", with the potential of hitting economic growth, consumer spending, and prices. Julia Coronado of MacroPolicy Perspectives said this on the sidelines at the NABE conference.

The November policy meeting may not be important for the Fed's decision to cut rates by a minimum of a quarter percentage point, just days after the U.S. Presidential election.

Erin McLaughlin is a senior economist with the Conference Board. She said that "if it is something which is still happening in the first weeks of November, we may be feeling the limitations." We have all learned about supply chains from the pandemic. The pandemic was not on our minds. "Normal consumers are now aware," she says, and worries that they may be more cautious about their spending if this strike continues.

Would it have a different impact if the policy was enacted in a reasonable timeframe? Loretta Mester, former president of the Cleveland Fed, said this in an interview given at the NABE Conference. You have to consider it. It will certainly have an impact on prices if it's long-lasting. If people are unable to get goods, or if there is a stop in activity, it could have an impact on the labor market. Reporting by Howard Schneider, Editing by Paul Simao

(source: Reuters)