The economy seems to have shaken off the impact of the 2017 season’s hurricanes, due in part to an increase in net exports. Indeed, car sales spiked in September as consumers replaced cars flooded during the storms, although they dipped into their savings to do so. Consumer spending should also get a boost from hurricane-related insurance pay outs. The hurricanes likewise seemed to have little lasting impact on overall employment. We expect the unemployment rate to continue to fall, perhaps going below its multi-decade low in the late 1990s. However, we don’t necessarily believe this will lead to higher wages or inflation.
Productivity growth remains muted, while most areas of the economy (outside housing) are not experiencing pricing pressures. Indeed, durable goods prices are actually falling on the back of global competition and automation. As a result, inflation may not reach the Fed’s 2% target.
Nevertheless, the Fed will continue to raise rates, tolerating the low inflation, at least until unemployment stabilises. Fed officials are aware that abnormally low long-term interest rates are fostering inflated asset prices and may pose risks to financial stability if they are sustained.
