New York Fed finds slightly higher supply chain pressure in January

By Michael S. Derby

(Reuters) - Supply chain pressures rose but remained quite low at the start of the year suggesting shipping disruptions tied to trouble in the Middle East have yet to manifest themselves in generalized disruptions, a report from the Federal Reserve Bank of New York said on Tuesday.

The bank's Global Supply Chain Pressure Index for January moved to -0.11, from December’s -0.15. A reading below zero suggests below normal supply chain pressures.

January's reading remains also well below the record 4.33 reading hit in December 2021, when supply chains around the world were hard hit by disruptions tied to the coronavirus pandemic.

That supply chain upheaval was a key driver in a global surge in inflation pressures that drove the Federal Reserve to raise its short-term interest rate target aggressively while taking steps to also reduce the size of its footprint in bond markets.

Over recent months inflation pressures have abated so sharply that the Fed is now weighing cuts in its interest rate target, although that easing appears likely to come slower than many in markets had been expecting.

“We think inflation is coming down,” Fed Chair Jerome Powell said in an interview with television news program 60 Minutes made public on Sunday. “We just want to gain a little more confidence that it's coming down in a sustainable way toward our 2% goal” before lowering rates.

Some of the uncertainty around inflation is tied to events in the Middle East that have seen attacks on shipping in the Red Sea, forcing traffic toward much longer routes that will almost certainly lead to higher shipping prices. That could in turn pressure inflation higher and runs the risk of complicating the Fed’s mission.

In his interview, Powell flagged geopolitical risks as a factor that could affect the outlook that’s out of the Fed’s ability to control. But he saw the trouble around the Red Sea as a bigger threat to other nations, saying shipping diverted around the Cape Horn in Africa is “going to affect Europe much more than it's going to affect us.”

The Fed chair said at last week’s press conference following the latest Federal Open Market Committee meeting that broadly speaking supply chains “are not perfectly back to where they were” and that suggests improvement there could still be a positive to lowering inflation.

(Reporting by Michael S. Derby; Editing by Andrea Ricci)