Gee, I'd a thought they could stop raising rates if their aim was to slow inflationary cycle...Katrina slowed that sysle and oil will slow the cycle by adding frieght premiums for every item shipped...I don't understand this...I need to think of the macro implications!

Date:   9/9/2005 3:52:17 AM ( 19 y ago)

Fed to keep raising rates despite Katrina
Thu Sep 8, 2005 6:38 PM ET
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By Glenn Somerville and Alister Bull

WASHINGTON (Reuters) - A swelling chorus of Federal Reserve policy-makers say the best way to help the U.S. economy heal from Hurricane Katrina is to keep inflation in check -- a sign interest rates will keep rising as planned.

Less than two weeks before a September 20 scheduled meeting of the U.S. central bank's policy-setting Federal Open Market Committee, chances the Fed might pause in its rate-rise cycle in recognition of the storm's impact were diminishing.

"The greatest contribution monetary policy can make is to keep the national economy on an even keel," San Francisco Fed Bank President Janet Yellen told community leaders in San Francisco on Thursday.

"Monetary policy, unfortunately, has little scope to cushion the immediate economic fallout from such a severe and sudden blow to a region," she said.

The Fed has boosted its trend-setting federal funds rate target 10 times since June 2004, in quarter-percentage-point increments, as it aims to reach a "neutral" rate that neither spurs inflation nor slows growth.

That has raised the fed funds rate to 3.5 percent, still relatively low by historical standards.

The key argument for a rate pause would be to counter the potential drag from the hurricane, which wreaked havoc on the Gulf Coast and on vital oil-refining and distribution facilities clustered in the region. But even before Katrina, policy-makers were wary of rising price pressures from costlier imported oil and other sources.

HIGHER RATES

Last week, Philadelphia Fed Bank President Anthony Santomero said it will take considerable time to assess the disruption to oil distribution and production. He also said the hurricane's impact, traumatic as it is regionally, will not derail expansion and policy-makers must beware of rising labor costs and diminishing slack in labor markets.

"To keep these incipient price pressures well-contained, the Fed will have to continue shifting monetary policy from its current, somewhat accommodative stance to a more neutral one," Santomero added.

Speaking to a business group at Temple University, Santomero predicted the economy will grow at a 3.5 percent to 4 percent rate in 2005 and also in 2006 -- a solid pace that likely would continue to take up slack in job markets.

Prices for imported oil -- and for retail energy products like gasoline -- are expected to remain elevated for some time and economists at the Fed and elsewhere still are trying to assess how that will affect consumer spending patterns.

In an interview with Reuters last Friday, Richmond Fed Bank President Jeffrey Lacker said the economy should be able to weather costlier oil because consumers were less uneasy now than in the past about its inflationary impact. In past episodes of costlier oil, notably in the 1970s, consumers feared the Fed would let oil prices pass through to inflation.

"I don't think that is the case now and I think that is why there is reason to believe there will be less pass-through to inflation right now and the dislocation to the real economy will be substantially less," Lacker said.

That would be another reason for the Fed to maintain its guard against the debilitating fear of inflation, by sticking with its course of small, steady interest-rate rises to keep price rises in check.

Chicago Fed Bank President Michael Moskow, a voting member of the FOMC, on Wednesday underlined that his concern remained with curbing inflation, rather than worry about a slowdown.

"I'm concerned about core inflation running at the upper end of the range that I feel is consistent with price stability," Chicago Fed Bank President Michael Moskow said in a speech to a business group on Wednesday.

There is general agreement the pace of growth will lose a step in this year's second half because of the tens of billions of dollars worth of damages from Katrina, but some of that will be regained at a potentially strategic point next year.

Former Fed Governor Laurence Meyer said Katrina would take a chunk out of growth in the second half of 2005, when the economy would otherwise have been very strong, and rotate it into 2006 when growth would have been weakening.

"The big story here is the underlying resilience of the economy, the shifting of growth from this year to next year and the need for monetary policy to remain on an appropriate track," he said.

"You're at the same place by the middle of 2006 than you would otherwise be ... therefore, monetary policy should be about where it would otherwise be," Meyer said.

He didn't rule out a pause in September if the Fed wanted to buy some hurricane risk-insurance. But he warned this could cause communication problems the Fed would need to resolve by making very clear in the accompanying statement that tightening would then resume.




 

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