Fed hikes swept away in hurricanes?

Via Karen Moley:

… economists warn the US central bank will have no option to shelve any plans for hiking US interest rates this year to compensate for the hit to US economic activity after Harvey shuttered businesses and made it impossible for people to get to work. Some estimate that Harvey could slice as much as 1.5 percentage points off US GDP growth in the third quarter,  and that the economic impact of Irma, depending on where it makes landfall, could be even greater.

The US Federal Reserve is already keenly aware that Harvey has caused economic activity to weaken. Its latest “beige book” – a roundup of anecdotal information about regional economic conditions which was compiled before Harvey hit – contains a special note on Harvey’s economic impact.

“Hurricane Harvey created broad disruptions to economic activity along the Gulf Coast in the Dallas and Atlanta Districts, although it was too soon to gauge the full extent of the impact”, said the report, which was released overnight.

I doubt one hurricane is enough. The Fed will simply look through it given both price and output effects will be fleeting. But two might be different, let alone four:

This may well be the perfect excuse to push back tightening given inflation just won’t play ball.

On that, here’s Morgan Stanley:

We have lowered our core PCE forecast trajectory,and now see core PCE ending 2017 at 1.4%Y and 2018 at 1.7%Y. As a result, following a rate hike in December, we now see the FOMC raising rates three times in 2018 versus four previously. Various forces are eating away at inflation,and offsetting the progress in segments of inflation driven by a tight labor market—i.e., the Phillips curve. Recognition of these lets us conclude that recent declines in inflation are not just ‘idiosyncratic’ but also reflect broader trends that should persist—making it ever harder to achieve the Fed’s 2%Y target. We have identified and discuss five drivers—(1)

Recognition of these lets us conclude that recent declines in inflation are not just ‘idiosyncratic’ but also reflect broader trends that should persist—making it ever harder to achieve the Fed’s 2%Y target. We have identified and discuss five drivers—(1)

(1) risinguse of technology, (2) domestic oversupply, (3) China overcapacity, (4) a structural bull market for the

(2) domestic oversupply, (3) China overcapacity, (4) a structural bull market for the

(3) China overcapacity, (4) a structural bull market for the

(4) a structural bull market for the dollar,and (5) falling inflation expectations—thathave depressed inflation and are likely to continue doing so in the medium term. The only component to counter these

(5) falling inflation expectations—thathave depressed inflation and are likely to continue doing so in the medium term. The only component to counter these

The only component to counter these forces,and the one that the Fed has historically relied on—the Phillips curve—has not been powerful enough to offset the drag from other forces. The outlook for inflation is not encouraging, particularly to monetary policymakers

The outlook for inflation is not encouraging, particularly to monetary policymakers that have set what increasingly looks like a lofty and sustainably unachievable inflation goal of 2%Y. The FOMC is faced with an increasingly difficult trade-off—how to balance persistently low inflation, which might inform a do-nothing stance, versus easy financial conditions, which might inform continued rate increases to maintain financial stability.

Yellen stands clearly on the preemptive side, as do a number of her colleagues on the FOMC. Convincing markets that further rate hikes are appropriate remains the greatest challenge.

This will keep the pressure on the USD for the next few weeks at least…

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