The Federal Reserve is likely to conclude that Hurricane Katrina poses more risk of inflation than of economic slowdown, and probably will raise rates on Sept. 20 while signaling it may pause later if there are lingering effects on growth and hiring.
“If you look at the record at how the U.S. has weathered shocks, we have a very, very resilient economy,” Harvey Rosenblum, director of research at the Federal Bank of Dallas, said. Fed policymakers are likely to weigh their response to Katrina against how strong the economy was before the storm. “Initial conditions matter,” he said.
Current and former Fed officials also are stressing odds that any slowdown will be temporary and emphasizing their reputations for keeping inflation at bay. Together, the comments suggest policymakers aren’t convinced they need to stop raising rates, even if their Sept. 20 statement is reworded to give them room to pause later if data warrant.
The Fed’s credibility helped keep Americans’ price concerns anchored even as gasoline costs jumped 38 percent in the year’s first half, said Richmond Fed Bank president Jeffrey Lacker.
Neither Rosenblum nor Lacker, who is a nonvoting member of the Federal Open Market Committee this year, would offer predictions on the path of interest rates. Anthony Santomero, a voting member and Lacker’s counterpart at the Fed Bank of Philadelphia, said in a speech after the storm that he expects the Fed to keep raising rates at a so-called measured pace.
