Hurricanes Batter US, Forcing Fed's Attention

Economists suggest that two consecutive hurricanes may indeed justify the Federal Reserve's cautious approach.

The two devastating hurricanes that have struck the southeastern United States in recent weeks will make it more difficult for the Federal Reserve to assess the economic situation. However, analysts anticipate that the Federal Reserve will continue to lower interest rates by 25 basis points at their meeting early next month.

ING's Chief International Economist, James Knightley, stated, "Weather conditions make policy-making very challenging and justify a cautious approach." He added, however, that a 25 basis point rate cut is possible.

Some economists are forming their views based on a recent speech by Federal Reserve Chairman Powell, in which he implied that the baseline expectation is for continued rate cuts of 25 basis points in the future.

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Knightley said, "Unless circumstances change, we believe they will indeed follow this path."

In the past, the Federal Reserve has tended to disregard the temporary supply shocks caused by natural disasters.

When Hurricane Katrina hit the Gulf Coast of the United States in 2005, the Federal Reserve was "verbally sympathetic to the hurricane's devastation but continued to raise rates by 25 basis points at each meeting," said Pantheon Macroeconomics' Samuel Tombs.

However, Diane Swonk, Chief Economist at KPMG in the United States, pointed out that the increasing frequency and severity of recent natural disasters mean that the Federal Reserve is finding it increasingly difficult to ignore them.

After hurricanes, there is always a surge in unemployment benefit claims. Hurricane Helen made landfall in Florida on September 26th, and the first evidence of this destruction was the unemployment benefit claims report. The latest report shows that the number of unemployment benefit claims has reached its highest level in over a year.

Santander's Chief Economist, Stephen Stanley, said, "The impact of hurricanes is not unusual for this season, but the extent of the damage caused by Hurricane Helen indicates that there will be a significant and lasting increase in initial jobless claims."Hurricane Milton, which struck Florida on Wednesday night, will bring another temporary increase to the number of initial jobless claims. Tombs of the Pantheon indicated that the number of applications may surge to around 270,000 before it begins to decline. The impact of the two hurricanes may not fully dissipate from the data until mid-November.

Additionally, on November 1st, the United States will release the October non-farm employment report, a week ahead of the Federal Reserve's interest rate meeting.

Nationwide economist Oren Klachkin said, "We believe that recent hurricane activity could reduce the number of new jobs added in October by as many as 50,000." He stated that due to the hurricanes and the strike at Boeing, Federal Reserve officials will need to "exercise caution" regarding the next employment report.

Nancy Vanden Houten, Chief U.S. Economist at Oxford Economics, said the storm's impact "could last for several weeks," and the October non-farm employment report may "take a considerable hit."

Regardless, Federal Reserve officials are accustomed to occasional disruptions in economic reports, "we are usually able to figure out what these impacts are," said Richard Moody, Chief Economist at Regions Financial.

Vanden Houten and Moody also anticipate a 25 basis point rate cut by the Federal Reserve in November, despite this week's higher-than-expected CPI data.

Economists say that the details of the CPI report do not indicate a degree of inflation acceleration sufficient for the Federal Reserve to abandon a 25 basis point rate cut. Moody said, "They are more concerned about the labor market than inflation."

Federal Reserve officials have already hinted at their intention to continue lowering the benchmark interest rate, with Chicago Fed President Goolsbee stating earlier:

"I believe we will take gradual action; the job market has cooled to a sustainable level, and the Federal Reserve wants to maintain this level."