Interest Rates To Continue Rising

 

Sept. 20, 2005--Economists expect the Federal Reserve to raise the rate that banks charge each other for overnight loans as the economy takes the impact of Hurricane Katrina in stride.

Economists initially worried that widespread hurricane damage would derail economic growth as rebuilding costs mounted and already tight oil and gas supplies were further constrained. Some speculated that the Fed would relax its policy of raising rates in response. But economists say that the federal government's commitment to rebuild the area, and the localized nature of the economic aftershocks have taken pressure off of the Fed to cut rates amid rising energy costs and creeping inflation.

"Louisiana and Mississippi together only account for only about 2% of GDP," said William Dunkelberg, chief economist for the National Federation of Independent Business. "The human tragedy can't be overstated, but I expect to see business as usual for the national economy."

The Small Business Administration is marshalling $2.6 billion in low interest loans to homeowners, renters and businesses affected by the hurricane. This response eases pressure on the Federal Reserve to keep rates low in order to stimulate the economy and inject money into banks for reconstruction loans, said Dunkelberg.

"The Fed should have no reason to change course from its long-term agenda of maintaining price stability on a national level," he added.

Economists at Goldman Sachs released a report on Friday saying that the hurricane's impact on national economic growth will be limited. "The risk of an extreme downside now looks quite low," wrote chief economist Bill Dudley. "Although disruption to the affected region is obvious, substantial, and far from over, little evidence exists of a broader effect from the initial surge in energy prices which have since receded significantly."

Dudely concluded that the Fed "does not appear ready to call for a rain delay" in raising the overnight rate.

/fian

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