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Will Hurricanes Harvey, Irma lead to higher U.S. interest rates? Yes, and maybe recessions

Erin Arvedlund, Inquirer Staff Writer

Updated: Monday, September 11, 2017, 3:01 AM

On Thursday, the eye of Hurricane Irma was just north of Hispaniola, with Hurricane Katia in the Gulf of Mexico and Hurricane Jose in the Atlantic Ocean.

We’re blown away by how much of an impact killer hurricanes Harvey and Irma (and potentially Jose) might have on ordinary citizens — and on the U.S. markets.

The Federal Reserve, America’s central bank, may delay an interest-rate increase in December, according to New York Fed president William Dudley, who told CNBC on Friday that it’s possible the storms “could have effect on the timing of short-term rate increases.”

Financial planner Walter Schwenk, with Wells Fargo Advisors in Marlton, concurred: “The Fed will probably reconsider a rate hike, depending on the severity of the hurricanes. They’ll have ample time to assess the slowdown.”

What about the markets and our slow-but-steadily chugging economy? John Mousseau, director of fixed income at Cumberland Advisors, said American investors are now faced with something we’ve not experienced before: two hurricanes of Category 4 or higher hitting the country in the same year. He researched “any trends or effects from these meteorological events on the bond markets” and found this: “Six months after landfall, there is a bias toward higher Treasury yields.”

“We observe rising yields, particularly in the Treasury area, after eight out of 12 storms and the last six storms in a row,” Mousseau noted. “We think that points to overall better insurance coverage as well as quicker response by federal agencies with relief dollars.”

That translates into rebuilding and a higher level of economic activity in the years after a storm, and U.S. bond markets perceive that as pricing in potentially higher inflation.

Muni bonds in affected regions, on the other hand, tend to sell off. With Hurricane Harvey hitting Texas and Irma’s effect in Florida, “from a portfolio management standpoint, we have sold some selective [municipal bond] credits ahead of Irma, the idea being that the lower-rated, uninsured bonds of smaller coastal areas are more vulnerable to headline risk than other credits that are larger or higher-rated.”

As for the future path of interest rates, he said, “look to the more recent history of bond yields after storms, combined with the fact that we are in a period of the Federal Reserve’s slowly pushing up short-term rates and getting ready to gradually reduce their balance sheet.

“Add in the impact of rebuilding after two massive hurricanes with insurance proceeds and federal dollars — particularly after what has been a longer time period since the last category 4, 5 hurricanes — and common sense leads us to believe that higher rates lie ahead of us in 2018,” he continued.

What about the stock market? There’s not as direct a correlation. However, one investor contends that stormy weather is often followed by financial storms.

Stephen Todd Walker, author of Wave Theory for Alternative Investments (McGraw HiIl, 2010), maintains a website showing data illustrating hurricanes and the U.S. markets and economy dating back to 1901. Walker contends recessions and bear markets frequently follow hurricanes; you can view the underlying data at stephentoddwalker.com/chartsandgraphs.php. In 1900, for example, a Category 4 hurricane hit Galveston, Texas (storms weren’t named back then), and shortly afterward, in 1901, the stock market peaked, then dropped 44 percent until it bottomed in 1903.

Student loan forgiveness

Did you go to law school or become a police officer or firefighter and take out student loans? Under a 2007 Bush administration program known as Public Service Loan Forgiveness, you could apply for debt wipeout after 10 years of continuous payments, starting in October 2017.

However, President Trump suggested that his fiscal year 2018 budget proposal eliminate the program.

Those who pursue careers in public service, such as teachers, firefighters, prosecutors and public defenders, and public-health nurses can apply to have their outstanding federal student debt forgiven after 120 on-time qualifying monthly payments. More than a half-million people have enrolled over the last decade. October is the soonest borrowers can receive forgiveness through the program.

Education Secretary Betsy DeVos has proposed trimming the loan-forgiveness program. Critics argue that it’s too expensive and disproportionately benefits graduate and professional school students, many of whom have six-figure debt loads. If her proposed cuts go into effect, only loans made before July 1, 2018, would still be eligible for forgiveness.

U.S. Reps. Ryan Costello (R., Pa.) and Brendan F. Boyle (D., Pa.) last month formed the Public Service Loan Forgiveness Caucus to focus on protecting the program. For more information, visit their websites: costello.house.gov and boyle.house.gov.

Erin Arvedlund, Inquirer Staff Writer

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