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How the Fed Will Factor In Hurricanes

How the Fed Will Factor In Hurricanes
(Alan Crosthwaite/Dreamstime)

By Wednesday, 20 September 2017 08:03 AM Current | Bio | Archive

Beware the conventional wisdom. The futures markets have priced in a 50 percent probability that Federal Reserve policy makers will deliver a third consecutive holiday-season rate hike, up from a scant 20 percent two weeks ago. Mother Nature may not be going along with the plan.

The question is, will Fed policy makers remain data-dependent even as storm effects move in? Or will Chair Janet Yellen and her fellow Open Market Committee members look past the noise in the data, leaning hawkish and validating New York Fed President Bill Dudley’s concerns that financial conditions have continued to ease despite the central bank’s almost three-year tightening campaign?

Last week, the Federal Emergency Management Agency designated 37 counties in Florida as disaster zones after Hurricane Irma. While the eye of the storm missed Tampa, Orlando and other metropolitan areas, Irma’s reach triggered massive flooding in other major cities such as Jacksonville.

According to Black Knight, FEMA’s numbers imply that storm damage nearly blanketed the state. More than 90 percent of mortgaged properties, three times the number associated with Hurricane Harvey and seven times more than Katrina, were affected and are now at higher risk of default. Black Knight’s Ben Graboske altered the estimate of the potential for lasting economic damage with the welcome news that Florida went into the storm with a mortgage delinquency rate that was lower than the national average. With luck, the 3.1 million properties with $517 billion in unpaid principal balances will be largely unaffected.

That same optimism has applied to potential losses that could emanate from the 1.2 million damaged homes that were in Hurricane Harvey’s path with a combined unpaid principal balance of $179 billion. Although estimates have come down in recent weeks, economists still expect Harvey to chock up at least $100 billion in economic destruction.

Traders say the combination of lowered economic storm damages, what’s hoped to be a dissipation of tensions with North Korea, and a more hawkish Bank of England resulted in the rising chances of a Fed rate hike come December. 

And yet, there are signs the economy was slowing before the threats of multiple hurricanes began to make their way into the data.

It’s beginning to look as if the slumping auto industry is affecting other areas of the local economies that are especially dependent on the sector. Although vehicle production rose in August after three months of decline, motor vehicle and parts production remains down 3.6 percent for the year. This makes sense, as car sales have slumped throughout the year after back-to-back years of records. Car sales fell 1.6 percent in August, the most since January, while surveyed buying intentions are hovering at a three-year low.

And though the National Association of Homebuilders cited fears of hurricane-driven rising labor costs for the surprise disappointment in its September builder sentiment index, it was the index for the Midwest that fell six points to 59. That dive was double that of the national index, which declined three points to 64, matching the weakest reading this year.

The surprising disappointment sent the Bloomberg Economic Surprise Index to its lowest levels of the year and prompted the New York Fed to lower its Nowcast forecast for economic growth to 1.3 percent for the third quarter and 1.8 percent for the fourth quarter.

Not only are the forecasts preliminary, a deluge of data that follow could throw the predictions in either direction. Still, most economists expect Hurricane Irma and the two in its wake, Jose and Maria, to dampen economic growth before it’s possible to see signs of rebuilding and recovery spending pan out in the data. If the New York Fed’s model is correct, GDP growth would round at 1.8 percent for all of 2017, precisely where it was for all of last year.

Consider this backdrop to be the known as monetary policy makers began their two-day meeting this week. Despite the signs that stagnation will prevail this year, the market is betting Fed officials will signal equal odds of a December rate hike, the third this year, via the so-called dot plot released at the conclusion of Wednesday’s meeting.

In August, Dudley, who is also vice chairman of the FOMC, noted that rather than tightening in response to rate hikes, financial conditions had been easing. “The stock market’s up, credit spreads have narrowed, the dollar has weakened,” he said, “and those have more than offset the effects of somewhat higher short-term rates.”

Earlier this month, Dudley reiterated his sanguine outlook noting that economic fundamentals are, “quite favorable,” and that the worries about the hurricanes were unfounded given that they would boost economic activity over the long term.

For now, the markets are buying into tail risks being safely out to sea. With 2017’s intense hurricane season showing no signs of abating, it remains to be seen how far-reaching the hurricanes’ outer economic bands will reach.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Danielle DiMartino Booth, a former adviser to the president of the Dallas Fed, is the author of "Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America," and founder of Money Strong LLC.

© Copyright 2020 Bloomberg L.P. All Rights Reserved.

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For now, the markets are buying into tail risks being safely out to sea. With 2017’s intense hurricane season showing no signs of abating, it remains to be seen how far-reaching the hurricanes’ outer economic bands will reach.
fed, hurricanes, factor, yellen
Wednesday, 20 September 2017 08:03 AM
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