Financial Flooding Will Recede

The physical damage from Hurricane’s Harvey and Irma can last for a long period of time, however, the overall economic damage is likely to recede and should do little to alter the US Federal Reserve’s strategy for tightening monetary policy.

In 2005, the Fed lifted short-term interest rates just a month after Hurricane Katrina ripped through the Gulf of Mexico. Janet Yellen, chair of the Federal Reserve may take a similar position in the wake of the recent storms affecting Texas, Florida, and Georgia. Economists’ estimate the total damage from Harvey and Irma will be $150bn-$200bn. The result is weakened annualized GDP growth in the third quarter.

Inflation could rise in the aftermath of the storms, driven by factors such as higher gas prices, following a 20% shutdown of overall U.S. refining capacity. Industrial production will be affected by shutdowns of factories and plants in Texas. In addition, power outages continue to pose a problem for Florida, as more than half of the homes and businesses in Florida were left without electricity, weakening business activity. However, analysts emphasize that disaster relief can lift growth as the rebuilding effort takes place, increasing labor wages in affected areas and leaving economic projections as they were.

The Fed’s Inflation readings will likely be affected by the storms, especially at a time when the central bank is highly sensitive to fluctuations in prices.  Many investors are now doubting the Fed’s ability to lift rates by another quarter-point by the end of the year. Greater clarity will come on Wednesday, the next official meeting of the Federal Reserve Board.

“Our thoughts and prayers go out to those affected by the recent storms. We wish everyone a safe and swift recovery” said Keith Knutsson of Integrale Advisors.