Economic uncertainty from Hurricane Katrina may force Federal Reserve Chairman Alan Greenspan and his colleagues to take a temporary break...
WASHINGTON — Economic uncertainty from Hurricane Katrina may force Federal Reserve Chairman Alan Greenspan and his colleagues to take a temporary break in their rate-raising campaign.
Before the hurricane spread devastation and death along the Gulf Coast, economists considered it a foregone conclusion that Fed policy-makers would boost short-term interest rates by another quarter percentage point to 3.75 percent at their meeting Sept. 20.
Now a growing number of economists says the odds are rising that the Fed might take a pass and leave its key short-term rate, called the federal-funds rates, at the current 3.50 percent. The funds rate is the interest that banks charge each other on overnight loans.
If that turns out to be the case, commercial banks’ prime lending rate — used for many short-term consumer loans, including variable-rate credit cards and popular home-equity lines of credit — would remain at the current 6.50 percent, the highest in nearly four years.
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“It would come across as incredibly cold-hearted to raise rates. Greenspan would be remembered as Ebenezer Scrooge,” said Mark Vitner, senior economist at Wachovia.
Greenspan is expected to step down from the Fed when his term expires on Jan. 31.
“Alan Greenspan is thinking about his legacy now. He doesn’t want to go out being someone who ignored the potential consequences of a very difficult disaster that hit us,” said Clifford Waldman, economist at Manufacturers Alliance/MAPI, a research group.
The Fed’s last rate increase came on Aug. 9. It marked the 10th quarter-point boost since the central bank began to tighten credit in June 2004. The Fed has been boosting rates to help fend off inflation and to return them to more normal levels.
Rates were sliced to extraordinarily low levels to rescue the economy from the 2001 recession and fallout from the decline of the stock market, the Sept. 11, 2001, attacks and a wave of corporate scandals.
Other economists continue to believe the Fed will lift the funds rate by a quarter point on Sept. 20, which would push up the prime lending rate to 6.75 percent.
“I think they’ll stick to the script,” said Mark Zandi, chief economist at Economy.com.
Even with the mixed opinions about what might happen on Sept. 20, many economists agree that, because of Katrina, Fed policy-makers aren’t likely to raise interest rates as much this year as previously thought.
Before Katrina, many economists predicted that quarter-point rate increases not only would come in September but also at the Fed meetings on Nov. 1 and on Dec. 13.
Now, economists believe the Fed could skip increases in November, December or possibly both months to assess the economic impact of the hurricane.
Barring additional jolts to the economy, these economists believe the Fed would resume lifting rates again in 2006, when overall economic activity is expected to be helped by rebuilding hurricane-ravaged communities.
For now, it’s a delicate dance for the Fed.
On the one hand, the Fed needs to look for signs of economic weakness, which would weigh in favor of at least leaving rates alone. On the other hand, it must be on the lookout for signs of inflation, which would augur for raising rates.