In the weeks since Hurricane Katrina left previous U.S. forecasts sodden and muddy, analysts have been debating the impact of the storm’s devastation on the nation’s economy.
Federal Reserve Chairman Alan Greenspan is one forecaster who also can sway economic winds, and with his term as central bank chief nearly over, it’s certain that he wants to correctly predict their direction.
Most analysts assume Greenspan and his colleagues on the Federal Open Market Committee will hike interest rates when they meet on Tuesday. The Fed has been inching rates up since June of last year, and the benchmark federal funds rate currently stands at 3 percent.
“They’ll raise rates in September and November, but the meeting will give the Fed the opportunity to take their “measured’ comment out,” said Diane Swonk, chief economist at Mesirow Financial.
She was referring to the Fed’s statement, made after their August meeting, that “policy accommodation can be removed at a pace that is likely to be measured.” Those words, pounced on by market watchers, were a reiteration of prior Fed comments and signaled that central bankers remained on a rate-tightening path.
However, members of the Fed “don’t want to seem callous” in the wake of Katrina’s devastation, Swonk said. “And there is a lot of uncertainty about Katrina,” especially given its damage to Gulf Coast ports and oil refineries.
“These kinds of events” (disasters) put downward pressure on gross domestic product in the near term, with a pick-up later, said Douglas Duncan, the Mortgage Bankers Association’s chief economist.
Duncan expects housing starts will follow a similar pattern, although they will still hit an overall record high for 2005, he predicts. Katrina will “slow starts somewhat at the end of this year, but they’ll pick up next year,” he said. August housing starts are set for release Tuesday.
, and consensus estimates call for starts to come in at 2.025 million units, according to Briefing.com, weaker than July’s 2.042 million.
As for the Fed, “In the long run, they’re (Fed members) going to continue to march against inflation,” Duncan said. “In the Fed’s view, inflation is not compassionate to poor people,” who have been hardest hit by the hurricane.
Nonetheless, “if they’re going to pause (in their drive to raise rates), they’re likely to do it this time,” Duncan predicted, rather than at their meeting in November or December. He now expects the fed funds target to be 3.75 percent at year-end, a change from his pre-Katrina forecast of 4 percent.
The index of leading economic indicators, set for release Thursday, also may be worth a look, but Dana Saporta, economist at Stone & McCarthy Research Associates, said initial weekly jobless claims, also set for release Thursday, will be more interesting. Saporta expects claims will rise in the wake of Katrina to 450,000 for the week that ended Saturday, from 398,000 previously.
As for bonds and stocks, oil price volatility is keeping the stock market on a slippery slope. And as Saporta pointed out, “Everyone is loath to do too much” ahead of the Fed’s meeting.
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