Federal Reserve Bank of New York President William Dudley said back-to-back hurricanes in the third quarter will eventually lead to increased economic activity over the long run despite any tragic consequences.
The storms also could temporarily influence the timing of the next interest-rate increase, although above-trend growth does warrant continued gradual rate hikes.
With Texas just starting to recover from Hurricane Harvey and southern Florida bracing for Irma, Dudley told CNBC in an interview that “it’s possible they could have effect on the timing of short-term rate increases. But I think that’s probably further out anyway.”
Dudley said the initial impact in both human and economic costs will be harmful. But in the long run, economies tend to snap back from such major events.
"Those effects tend to be pretty transitory," Dudley said in a live interview with CNBC. "The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms," he said.
"I would expect that by the time we get to the end of the year and early 2018, the transitory negative effects of this storm I think will be over and we actually will start to see some of the benefits of the rebuilding efforts in terms of boosting the economy," Dudley said.
The Fed is expected to announce the start of a gradual process to shrink its $4.5 trillion balance sheet at its Sept. 19-20 meeting in Washington while keeping rates on hold amid a spate of disappointingly weak readings on inflation, Bloomberg explained.
U.S. central bankers hiked in March and June, and in June forecast they would raise a third time this year to a range of 1.25 percent to 1.5 percent.
Dudley said that he didn’t think the storms would affect the balance-sheet move, which he expects to happen “relatively soon,” and that a decision on when to raise rates again was a question for later in the year.
“It’s too soon to judge exactly the timing of when the next rate hike might occur, but I think the path is still clear that short-term rates are going to move gradually higher over time,” he said. While he was marking down his third-quarter growth forecast “a touch” and the storms would affect incoming economic data over the next few months, he was otherwise upbeat on the economy.
“I’m pretty optimistic the expansion’s going to continue. I’m pretty confident it’s going to continue at an above-trend pace, and that’s why I think that as time passes, the Federal Reserve will continue to gradually remove monetary policy accommodation.”
(Newsmax wires services and Bloomberg contributed to this report).
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