Fed hikes rates, says Katrina impact appears temporary
Federal Reserve policymakers lifted their base rate by a quarter-point to 3.75 percent, saying that Hurricane Katrina is likely to have only a temporary impact on the US economy.
It was the 11th consecutive rate hike by the central bank's Federal Open Market Committee, which devoted much of its statement to Katrina's impact.
"The widespread devastation in the Gulf region, the associated dislocation of economic activity and the boost to energy prices imply that spending, production and employment will be set back in the near term," the committee said.
"While these unfortunate developments have increased uncertainty about near-term economic performance, it is the committee's view that they do not pose a more persistent threat."
Some analysts said the move was a vote of confidence in the US economy's ability to weather the impact of Hurricane Katrina and the devastation of New Orleans, while others said the central bank may be running the risks of slowing the economy.
The vote however was not unanimous as at most prior Fed meetings. Board Governor Mark Olson dissented, voting to hold rates steady.
The Fed board voted to increase the largely symbolic discount rate by a quarter percentage point to 4.75 percent on the request of seven of the 12 Fed banks.
Markets expect one or two more rate hikes from the Fed before the end of the year, but the FOMC gave no indication that it's done. The committee said current rates remain "accommodative" and suggested again that rates could be raised at a "measured" pace.
The decision indicates that the central bank "sees the economy as very resilient," according to Barry Hyman, equity market strategist at Ehrenkrantz, King and Nussbaum.
The inclusion of the phrase "measured pace" in the accompanying policy statement reveals that the Fed continues to keep raising rates, he said. References in the statement to the recent devastation caused by Hurricane Katrina in the Gulf Coast reveal that the Fed "understands that the impact will be temporary," Hyman said.
Rick Harper, portfolio strategist at RBC Dain Rauscher, said FOMC members "still have a fairly optimistic view of growth, (and) their concern is more on the inflation front."
Harper said the Fed action is "reassuring" because the central bank "remains on the ball on inflation."
Gary Thayer, chief economist at AG Edwards who had predicted the Fed would pause at the current meeting, said central bank policymakers may be running the risk of slowing the economy too much.
"I don't disagree with their view on the economy in the long run," Thayer said. "But I think they're overlooking the near-term impact" of Katrina, which provided "a good excuse to hold policy steady."
"Today's action will cement their credibility as an inflation fighter, but it comes at the risk of slowing the economy," Thayer said.
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