US Federal Reserve set to raise rates again By Andrew Balls in Washington Published: September 13 2005 21:56 | Last updated: September 13 2005 21:56
The US Federal Reserve is set to press ahead with its campaign of raising interest rates at its meeting next week, in spite of the economic impact of Hurricane Katrina. But there is expected to be intense discussion of whether substantial changes to the wording of the accompanying policy statement are needed.
Fed officials are reasonably relaxed about the hurricane's impact on national measures of production and consumer spending and employment.
A small dip in the second half of the year is expected to be recovered during the reconstruction effort.
Within the Fed, there is considerable scepticism about the need for the “compassionate” pause in the tightening campaign that some politicians have called for following the devastation in New Orleans and the surrounding region caused by Katrina. An important subject of discussion will be whether the Fed should drop its characterisation of monetary policy as “accommodation” and whether it should maintain its guidance that it is likely to continue raising the federal funds rate at a “measured” pace.
The Federal Open Market Committee has raised rates in quarter point steps at its last 10 meetings, lifting the target for the federal funds rate to 3.5 per cent.Of greater concern is the impact of rising energy prices, particularly the petrol price. Higher oil prices may affect consumer confidence and spending. At a time when there is little spare production capacity or labour market slack, this may also feed into core inflation.
Alan Greenspan, Federal Reserve chairman, speaking at the Fed's Jackson Hole conference last month, said the flexibility of the economy had allowed the US to weather the steep rise in energy prices “thus far”, purposely avoiding stating his views on the resilience of consumer spending and the likelihood of higher core inflation.
The market reaction since Hurricane Katrina suggests investors are concerned about the impact of higher energy prices on growth next year. The yield on the two-year Treasury note, which was above 4 per cent in late August, has dipped back below 3.9 per cent.
Data released yesterday showed that US wholesale prices jumped 0.6 per cent in August, owing to higher energy prices before the hurricane, but core consumer prices excluding food and energy were unchanged.
President George W. Bush, in a rare public admission of personal responsibility, yesterday acknowledged that the hurricane had “exposed serious problems in our response capability at alllevels of government, and to the extent that the federalgovernment didn't fully do its job right, I take responsibility”.
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