[The Editors' Verdict]Supply Chain Crisis: Powell Is Also an Accomplice

The global economy is trembling with inflation fears. Commodity prices are soaring, and coupled with the energy crisis, the burden on businesses and households is increasing. The common background behind the soaring commodity and energy prices is the supply chain bottleneck. Prices are rising because supply is not adequately supporting the increasing demand.

The biggest factor influencing demand is the COVID-19 vaccine. Since last year, the fear of COVID-19, which has weighed heavily on the world, has gradually eased with the rollout of vaccines. Although the highly contagious Delta variant is spreading rapidly, the anxiety is significantly lower compared to the time when vaccines were unavailable. As a result, the major economies have shown a clear recovery trend since the beginning of this year.

Nevertheless, fiscal authorities and central banks in various countries continue to implement stimulus measures, fueling demand. This is because the economy is still considered unstable. Since President Joe Biden took office, the United States has pushed through a super-expansionary budget. The U.S. central bank, the Federal Reserve (Fed), continues its quantitative easing policy at a scale of $120 billion per month.

On the other hand, supply has not fully recovered from COVID-19. While advanced economies are improving, Asian factories in countries such as China, Vietnam, and Malaysia, which actually produce goods, have not been able to operate properly due to COVID-19. As workers have not returned to their jobs, there is a shortage of port workers, ship crews, and truck drivers, leading to a global logistics crisis. The recent panic buying of gasoline in the United Kingdom also started against this backdrop.

Meanwhile, concerns have emerged that the supply chain crisis could slow economic growth. In fact, China, known as the "world's factory," saw its manufacturing Purchasing Managers' Index (PMI) fall below the baseline of 50 in September for the first time in 19 months, indicating a phase of economic contraction. There is also growing concern about stagflation, where economic growth slows while inflation occurs simultaneously.

Inflation is heightening a sense of crisis not only in the real market but also in the financial market. If inflation continues longer than expected, central banks such as the Fed may shift to tightening policies more quickly. In fact, Fed Chair Jerome Powell recently expressed concerns about prolonged inflation at a conference hosted by the European Central Bank (ECB), stating, "Inflation is exceeding targets due to strong demand for goods and bottlenecks." He also said it is "frustrating" to see bottlenecks and supply chain problems not improving.

The market was even more surprised than Chair Powell. This was because his tone was quite different from the repeated "inflation is temporary" statements he had made until now. The market has only now begun to focus on the possibility of early interest rate hikes due to inflation, causing major stock markets in the U.S., Europe, and Asia to fluctuate in recent days.

However, Chair Powell is not free from the current supply chain bottleneck and inflation issues. Inflation concerns have been raised since early this year, but Powell delayed tapering (reducing asset purchases) because of the delayed recovery in U.S. employment. As a result, enormous liquidity continued to flow into the market, stimulating prices. Asset market bubbles have grown significantly, and wealth inequality has deepened.

Looking back, one might even think that in the tense tug-of-war between the market and the Fed, the Fed was dragged along unilaterally. This is despite the fact that the employment recovery to pre-COVID-19 levels that Powell expects may never be possible.

This content was produced with the assistance of AI translation services.