The recent storms that wreaked devastation in Texas and Florida are widely expected to have a major impact on the U.S. economy, in ways both good and bad. But even if they move the needle in terms of economic growth, they’re unlikely to change the thinking of the Federal Reserve.
The U.S. central bank has said it will be “data dependent” when it comes to whether it will raise interest rates, meaning it will only do so when it deems the economy strong enough to withstand such a move. While the impact of Hurricanes Harvey and Irma will likely show up in economic data, the Fed will look past any short-term fluctuations in charting its policy path, according to one investment bank.
“We firmly believe that economic reports are going to be influenced for many months or longer by these two massive hurricanes,” wrote Scott Wren, senior global equity strategist at Wells Fargo Investment Institute. “The Fed is likely going to take this into account when making monetary policy decisions and won’t be as purely data-dependent as its past rhetoric might suggest.”
AccuWeather recently estimated that Harvey and Irma could cost the U.S. up to a combined $290 billion in damage, which could amount to a GDP hit of 1.5%. The impact could be widespread, both economically and geographically, given the damage to a variety of industries. In addition to the structural damage of infrastructure and housing in the storm-affected areas, they could cause national changes to food prices, to the extent crops were impacted, as well as energy prices. By some estimates, gas prices could have risen as much as 15 cents a gallon in the wake of Harvey, which was concentrated near the nation’s largest refining hub.
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Wren speculated that while the Fed would acknowledge the economic impact of the storms when it releases a statement next week—following its two-day monetary policy meeting—but that it would also “hint that future rate hikes are still on the table for later this year and in 2018.”
If the central bank does hold to its previously scheduled pace for raising its key interest rate, it is unlikely that major U.S. asset classes will see any Fed-related volatility VIX, +0.62% , as such expectations have already been priced into both stock prices and bond yields. Currently, about half of investors polled expect the Fed will raise rates at its December meeting, according to data from the Chicago Mercantile Exchange.
Lower rates are typically seen as positive for stocks SPX, +0.13% , although many traders might take it as a negative if the Fed decides that the economy is still too weak to warrant more aggressive action in normalizing its policies. Higher rates could mean that bond yields rise, which would weigh on bond prices, as the two move inversely to each other.
Storms can have both a positive and a negative impact on the economy. While property damage, for example, is a negative cost, there can also be a positive impact that follows from rebuilding efforts.
“There is virtually no doubt that economic growth in the U.S. will be negatively affected in the near term due to the devastation Harvey and Irma caused,” Wren wrote to clients. “But the equity market knows that once the rebuilding process begins, probably early next year, if not sooner, GDP may see a boost as homes, businesses, and infrastructure are rebuilt. Major hurricanes in the past have created only temporary road bumps for the overall U.S. economy. We expect a similar outcome this time around.”
Last week, the president of the New York Federal Reserve William Dudley said he thought it was “too soon to judge exactly the timing of when the next rate hike might occur,” though the storms were unlikely to cause changes to its timeline. “The path is clear that short-term rates are going to move gradually higher over time.”
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