Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / Why the Fed Watches the New York Fed's Supply Chain Index
Transcript
- Lucas: So the New York Fed's Global Supply Chain Pressure Index — that's the one that tracks shipping rates, port backlogs, delivery times — it fell again in July, and that's quietly become the Fed's favorite excuse to stay patient. Luna: I feel like every Fed watcher has their own pet indicator right now. Why is this one worth our attention? Lucas: Because it's one of the few forward-looking signals that actually led the inflation spike in 2021 and 2022. When that index spiked, we saw goods inflation follow a few months later. Now it's been trending down for over a year, and it gives the Fed cover to look past those sticky service prices. Luna: Right, the index is at something like minus one point two now, down from plus four at the peak. That's a massive swing. Lucas: Exactly. And it's not just the level — it's the direction. The Fed's models are still catching up to the fact that the pandemic-era supply shocks have fully unwound. So when the manufacturing survey came out this week showing price worries 'worse than pandemic era,' that's a contradiction the Fed has to resolve. Luna: That headline really caught my eye. How do you have supply chains normalizing but manufacturers still screaming about input costs? Lucas: Part of it is that the survey is about expectations, not current prices. Manufacturers are worried about tariffs, about energy costs, about the drought in Europe messing with river transport. But the actual flow of goods is fine. And the Fed tends to weight realized data over survey noise. Luna: So the supply chain index is the 'realized' data, and the survey is the 'noise'? Lucas: That's the framework. And it's why you see the ten-year breakeven rate falling — it's down to two point two three percent — while core PCE is still running a touch hot. The market is looking at the physical reality of shipping containers moving smoothly and saying inflation is going to keep cooling. Luna: But the Fed can't just ignore the survey. They've got to explain it in the minutes. How do they square that circle? Lucas: They'd argue the survey is capturing geopolitical risk — the China slowdown, the Europe drought, the lingering tariff effects. Those are real, but they're not broad-based demand pressures. The Fed's job is to separate the signal from the noise, and the supply chain index is as close to a clean signal as you get right now. Luna: And then you've got the labor market doing its own thing. The ADP number this morning was shockingly soft — 44,000 private jobs added in July, way below the 150,000 expected. Lucas: That is a big miss. And it's not just ADP — the JOLTS report last week showed openings falling to a three-year low. The labor market is clearly cooling, and for the Fed, that changes the risk calculus. They can't be as hawkish on inflation when jobs are starting to crack. Luna: So essentially, the Fed is juggling two conflicting realities: goods inflation is tamed, services inflation is sticky, and now jobs are weakening. What does that mean for the next FOMC meeting? Lucas: It means the bar for a hike just got a lot higher. The supply chain data says inflation is still on a downward path, and the labor data says the economy is slowing. That's a combination that screams 'hold rates steady.' Luna: But hold on — the manufacturing survey showed price pressures worse than pandemic era. If that's real, wouldn't that trump the supply chain index? Lucas: Look, the manufacturing survey is a diffusion index — it asks if prices are rising, not by how much. And it's notoriously volatile. The supply chain index is built on actual data: freight rates, delivery times, inventory levels. When those two disagree, the Fed tends to trust the hard data. Luna: I guess that's the difference between a temperature reading and a weather forecast. Lucas: Exactly. And right now, the forecast is for continued disinflation, with the risk of a sharper slowdown. That's why you see the two-year Treasury yield easing to three point seven three percent — the market is pricing in more easing over the next twelve months. Luna: So the Fed's next move is likely a cut, not a hike? Lucas: The market thinks so, but the Fed has been careful not to commit. They're data-dependent, and the data is mixed. But if the supply chain index stays low and the labor market keeps softening, the case for a cut builds quickly. Luna: Speaking of data, I know a lot of listeners rely on this show to make sense of these indicators. It's a lot of work to keep up with every release — and we do it all without ads. Lucas: That's true. A small group of listeners already chips in monthly through buy me a coffee dot com slash fexingo, and that's genuinely what keeps the lights on. If you've gotten value from these episodes, that's the simplest way to support us. Luna: Yeah, every little bit helps us keep the analysis independent and accessible. Lucas: Alright, back to the numbers. One thing I want to stress about the supply chain index is how leading it can be for the PCE deflator. When the index dropped sharply in late 2022, core goods PCE followed a few months later. We're seeing that pattern repeat now, which is why the Fed is comfortable looking past the recent uptick in core PCE. Luna: So the Fed is essentially using the supply chain index as a leading indicator for core goods inflation, and that's why they're not panicking about the services side. Lucas: Right. The services side is driven by wages and shelter, and those are lagging indicators. The supply chain index tells you what's coming down the pipeline. And right now, the pipeline is clear. Luna: But what about the geopolitical shocks? The drought in Europe, the China slowdown — those could disrupt the supply chain again. Lucas: Absolutely, and the Fed is watching that. But a drought affecting riverbeds is a localized shock — it might boost certain commodity prices, but it's not the same as a global container shortage. The supply chain index has a built-in resilience now because there's so much excess capacity in shipping. Luna: That's a good point. The index might be more stable now than it was in 2021 because the system isn't as fragile. Lucas: Exactly. And that's why the Fed can afford to be patient. They have a leading indicator that says inflation is under control, and they have a labor market that's starting to soften. Both of those argue for keeping policy steady, or eventually easing. Luna: So if the next CPI report comes in line with expectations, is that enough to cement a September hold? Lucas: I think so. The Fed has been clear they want to see more progress on inflation, and the supply chain index suggests that progress is already baked in. The August CPI report will be the last one before the September meeting, so it'll be decisive. Luna: And if the labor market keeps cooling, that might push them toward a cut sooner rather than later. Lucas: That's the balancing act. The Fed is walking a tightrope between inflation and employment, and right now, the supply chain data is their safety net. It's telling them the inflation side is handled, so they can focus on the labor side. Luna: So for our listeners, the key takeaway is that this obscure index is actually one of the most important things to watch in the coming months. Lucas: Without a doubt. If the supply chain index starts to tick up again, that's a red flag. But as long as it stays low, the Fed has room to support the economy if needed. Luna: And that's why we'll be keeping an eye on it. Thanks for joining us on this milestone episode. Lucas: Yeah, 150 episodes in and we're still finding fresh angles. See you next week.