The difficulty is that to contain inflation from the demand side, the only avenue open to policymakers, the Fed may have to dial the economy down so tightly that it causes recession. Currently low unemployment would rise, and people would be laid off, and the economy would tank. Whether this outcome is avoidable is the real question, and few have that answer.
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Former Treasury Secretary Lawrence Summers criticized the Federal Reserve recently for having “itchy fingers to start cutting rates.” His comments came a day after policymakers revised their forecasts for the central bank’s benchmark interest rate with the median estimate still indicating three rate reductions in 2024.
Despite the downward pressure on inflation, supply-side dynamics and numbers do not suggest the underlying inflation rate is around 2%.
Supply chains have not normalized after years of disruption caused by COVID-19 and the war in Ukraine. Attacks on commercial vessels in the Red Sea (and their subsequent rerouting alongside delays) have caused additional price bumps with shipping goods worldwide.
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Resolving the challenges is not easy. Supplier networks became increasingly complex as producers and retailers sought a globalized marketplace, expanding consumer demand and pursuing greater cost efficiencies.
The result is an overly extensive network of supplier relationships, routes and exchanges. As the story goes, if the world was required to buy locally for a week, consumer spending would nearly die (with most products flowing through multiple countries on the value chain to get to the end consumer).
The added dynamics of protectionism and near-shoring also create upward pressure on prices as companies are forced to reorganize supply chains on short notice.
For example, a fight for semiconductor dominance led to the CHIPS and Science Act, which is an American congressional act to bolster semiconductor capacity.
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President Biden also signed an executive order restricting outbound investments into China’s semiconductor, artificial intelligence, and quantum computing industries with the intent of preventing the transfer of know-how from American companies to Chinese companies.
As a result of these policies, companies are exploring new production hubs, such as India and Vietnam, for the technology sector. The likely outcome, as production hubs take time and capital to build, will be increased costs today due to delays in throughput at the new supply chokepoints.
The United States is still in the “toddler” stage of energy transition — a toddler believes he can do many things by himself that he does not have the skills, money or age to do today.
Energy transition without Chinese supply chains looks impossible — 80% of battery supply chains are in China as is a larger share of solar wafer production, according to Wood Mackenzie, a global provider of data and analytics.
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While U.S. officials have become more present at mining conferences across the globe, China was a first mover in pushing its mining companies to search the globe for the metals and rare earth elements.
The process of re-shoring and near-shoring supply chains for the United States will require significant capital. According to Wood Mackenzie, Net Zero requires $29 trillion of capital expenditure across power and renewables by 2050 with that number estimated to be 20% higher (an additional $6 trillion) for a “not made in China” transition for power.
Finally, new regulations on tailpipe emissions all but ensure that electric vehicles will make up 35% to 56% of the sales by 2032, according to the Environmental Protection Agency.
The new standards do not mandate the sale of certain vehicles but establish vehicle regulations that force carmakers and sales in one direction — yet road infrastructure, including charging stations, is…
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