The Federal Reserve is Keeping A Close Eye On Hurricane Rita
Friday, September 09, 2005Well, hurricane Katrina will probably be the hot topic of discussion with policymakers at the Federal Reserve tomorrow. The Fed meets to decide whether to continue raising short-term interest rates. Darren Gersh has a preview of what to expect.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: After 10 quarter percentage point interest rate hikes in more than a year, the Federal Reserve`s next move is no longer considered a sure bet.
TOM GALLAGHER, POLITICAL ECONOMIST, ISI GROUP: Looking at the futures markets, the market is the least sure about the near-term pace of Fed policy than they have been since the Fed started hiking rates.
GERSH: One reason, of course, is Katrina. Former Federal Reserve Governor Laurence Meyer`s best guess is the cataclysm will cut one percentage point off growth in the coming months. But it is only a guess and the Fed faces uncertainties about Katrina`s impact on both growth and inflation.
LAURENCE MEYER, VICE CHAIRMAN, MACROECONOMIC ADVISERS: Natural disasters typically lead to stronger economic growth after a period, so on the one hand it has to weigh the negative hit immediately against the added strength next year. That`s hard to put numbers on those.
GERSH: If Meyer is right, the economy will still be growing at a healthy 3.75 percent, enough to convince the Fed to raise rates tomorrow.
MEYER: The fundamental challenge is still to contain inflation in an economy that has been growing above trend and is arguably already at or close to full employment.
GERSH: But Alan Greenspan`s risk management philosophy is to head off low- probability events that can cause large economic pain. And in this case, former Fed Governor Lyle Gramley says the big fear is consumers will pull back, seeing Katrina as a warning to salt away some emergency cash.
LYLE GRAMLEY, SENIOR ECONOMIC ADVISER, STANFORD WASHINGTON RESEARCH: I think in this case, the low probability, negative consequence of a big rise in the personal saving rate will lead them to pause tomorrow and wait for the smoke to clear.
GERSH: Other Fed watchers believe the central bank will use tomorrow`s post meeting announcement to signal a more far-reaching change, perhaps suggesting that monetary policy is no longer on auto pilot.
GALLAGHER: That is, they probably drop measured pace -- which has been the shorthand for 1/4 point rate hikes -- but say that they are not done yet.
GERSH: Tomorrow`s meeting is not just a matter of simple economics. The Federal Reserve won`t want to be seen as unsympathetic should it decide to raise interest rates when so many hurricane survivors are trying to rebuild their homes and businesses. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
