The Fed’s Next Move

To raise of not to raise, that’s the question. After raising interest rates for 14 months, the Federal Reserve may temporarily hold off in the aftermath of Hurricane Katrina. I think that would be a mistake. The Fed needs to send a clear message to the market that it’s serious about attacking inflation.

The Fed meets again on September 20 and before Katrina, an 11th straight rate increase was basically a done deal. Now, it’s hard to say. The futures market puts the odds of another rate increase at 50%. After 9/11, the Fed cut rates by 50 basis points. The difference is that the economy was much weaker then. The Fed’s rate cut would have come about within a few months without 9/11.

The economic consequences of Katrina are still hard to gauge. The Congressional Budget Office said that the hurricane will cost 400,000 jobs and zap GDP growth by 0.5% to 1%. Then there’s the inflationary outlook, and that’s even murkier. The good news, however, is that oil prices finally seem to be pulling back.

I think the best move for the Fed would be to continue raising interest rates. Holding rates artificially low for too long won’t help Louisiana or the markets.

Posted by on September 8th, 2005 at 10:24 am


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