Speaking just as Irma is about to start battering Florida as a Category 4 storm, Dudley said the initial impact in both human and economic costs will be harmful. But in the long run, economies tend to snap back from such major events.
"Those effects tend to be pretty transitory," Dudley said in a live interview with CNBC. "The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms."
Dudley added that he didn't think the near-term economic damage would have much effect on Fed policy. He still believes the central bank will begin unwinding its $4.5 trillion balance sheet
"relatively soon" though he acknowledged that the timing of the next rate hike is up in the air.
"relatively soon" though he acknowledged that the timing of the next rate hike is up in the air.
In their most recent projections, Fed officials indicated one more rate hike this year on top of the two they already approved earlier. However, weak inflation data have led to dovish statements from Fed speakers, leading market participants to believe the next hike won't happen until well into 2018.
https://www.cnbc.com/2017/09/08/feds-dudley-hurricanes-will-boost-economic-activity-over-the-long-run.html
Vice Chairman Dudley's analysis regarding the long term economic effects seems to ignore the opportunity cost of this event. While rebuilding will occur and will create more economic opportunity than was destroyed and he will be correct in that sense. However, the opporuntiy cost would seem to be massive since all of the wealth that could have been created if the storm never hit will not materialize until later if at all. The effort of people fleeing, waiting out the storm, and then rebuilding means they won't be at their normal jobs creating wealth there. That wealth will be lost because of this storm.
ReplyDeleteLong run business investment to rebuild destroyed capital will lead to a jump in GDP, but is still projected to fall in total. With interest rates rates rising, it will become less profitable for business to invest. Unless investment is necessary, like after a hurricane to rebuild capital, businesses might choose to borrow less money causing a further shift downward in US GDP and production. The Fed hopes this will keep inflation at a stable rate.
ReplyDeleteI both agree with David about the rise in GDP. With a natural disaster the size of Irma and it being a category 4 storm households that may have been thinking about a slight remodel will now have to think about getting wholesale repairs such as a new roof, siding and furniture. With how many households that will be affected these numbers could be massive. That in turn will increase GDP like David said.
ReplyDeleteAlthough their while be economic growth in the long-run from the devastation that Irma and Harvey have caused, there is a predicted $290 billion set to affect the U.S. economy. While the economy will bounce back long-term, I'm interested to see how long it will actually take to make up the $290 billion of deficit to storm caused.
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