Hurricane Fallout Could Cloud Picture for Data-Dependent Fed

(Bloomberg) -- Harvey and Irma probably aren’t going to dent U.S. growth in any lasting way, but back-to-back hurricanes could make it tough for Federal Reserve officials to take the economy’s pulse as they ponder the timing of their next interest-rate hike.

“When we think about the impact of these storms, first of all it’s going to make it very difficult to read the economic data over the next few months because it’s going to be hard to know exactly what the data would have been ex the hurricanes,” William Dudley, president of the New York Fed, told CNBC in an interview Friday.

“It’s possible that they could have an effect on the timing of short-term rate increases,” Dudley added.

A big cloud hanging over economic data in the coming months will come at a tricky time for policy makers. They are already puzzled that lower unemployment has failed to spur inflation, which has weakened since March and has remained under their 2 percent target for most of the last five years.

Having raised rates twice this year, some U.S. central bankers have begun to question the prudence of a third move in 2017, as projected by quarterly Fed forecasts in June. In the meantime, investors have trimmed the probability of a move at the Federal Open Market Committee’s Dec. 12-13 meeting to around one-in-four, according to pricing in interest rate futures.

‘Strange Numbers’

Lingering doubts combined with storm-contaminated data could persuade the Fed to delay a rate action.

“It makes it much more difficult to deal with any kind of intended December rate increase,” said John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina. “I’m sure we’ll still get 2.5 percent growth for the year ahead, but I am concerned, with the focus on inflation, that we’re going to get some strange numbers” on price movements.

The exodus of people from the storm zones, then workers flooding in, could alter lodging prices for a period, Silvia said. Car production and prices will also shift temporarily due to demand that will follow the destruction of hundreds of thousands of cars, he said.

Still, several other economists were more skeptical that the storms’ fallout will pollute the data long enough to meaningfully disrupt the Fed’s decision making.

“Irma is a big question mark, but our base case is that the data volatility clears out by the time of the December meeting,” said Jacob Oubina, senior U.S. economist at RBC Capital Markets in New York.

Filter Out

Drew Matus, chief market strategist at MetLife Investment Management in New York, said it should prove easy to filter out the storms’ impact on employment because that information is reported on a state-by-state basis.

For example, initial jobless claims in the U.S. rose by 62,000 in the week ended Sept. 2 to 298,000. But the fact that claims in Texas rose by about 52,000 made it clear Hurricane Harvey was responsible for much of the rise. The same should apply to industrial production, though the storms’ impact on wages and prices will be harder to tease out.

“I don’t think it’s going to be huge black cloud of uncertainty,” said Michael Hanson, chief U.S. macro strategist at TD Securities in New York. “By the time December rolls around, the bigger question will be the political environment,” he said, referring to whether Congress and the Trump administration will act by the end of the year on tax reform, the budget and the debt ceiling.

“Those will probably be more relevant than the implications of natural disasters,” he said.

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