President Bush had lunch with Federal Reserve Chairman Alan Greenspan yesterday to discuss the economic impact of Hurricane Katrina, heightening speculation among analysts and investors that the central bank might slow its interest rate increases in response to the storm's effects.
The meeting took place on a day when the president also met with his economic advisers for a preliminary assessment of the storm's effects on the U.S. economy.
"We particularly spent a lot of time talking about the damage done to our energy infrastructure and its effect on the availability of the price of gasoline," Bush said afterward. "In our judgment, we view this storm as a temporary disruption that is being addressed by the government and by the private sector."
Even before Bush's comments, analysts were already predicting that soaring gasoline prices, disrupted transportation systems and a possible pull-back in consumer spending would persuade the Fed to take a breather after raising its benchmark short-term interest rate steadily higher for more than a year.
And some said Hurricane Katrina, by pushing up inflation and slowing economic growth, may be the final challenge for Greenspan, who plans to step down as Fed chairman early next year after helping steer the U.S. economy through trouble many times before.
"This is the guy you want now," Richard Yamarone, director of economic research at Argus Research Corp., said of Greenspan, who took office in August 1987, shortly before the stock market crashed that October. White House officials have said Bush will not nominate a successor until next year, leaving many economists to speculate about whether any of Greenspan's likely successors will be as adept at navigating economic turmoil.
"God forbid this happened next year when we'll have a new kid on the block," Yamarone said before pausing to recall, "We did have that with Greenspan in 1987, and he did fine."
Before Katrina, analysts and futures contracts tied to the benchmark federal funds rate forecast that the Fed would lift the rate at each of its three remaining scheduled meetings this year, to 4.25 percent. By yesterday, however, they were predicting that the Fed would not push the rate so high, and might pause as soon as the upcoming Sept. 20 meeting, leaving the rate unchanged at 3.5 percent.
"For economic policymakers, the landscape has materially changed," said Ray Stone, an economist at Stone & McCarthy Research Associates. "It no longer would be prudent to regard a Sept. 20 [rate increase] as a foregone conclusion."
Fed officials could explain a change in policy "as not a deviation in course, but as a pause to evaluate temporarily unsettled economic conditions," Stone said.
Some analysts said Bush's comment about the storm causing a "temporary disruption" indicated that the Fed was likely to keep raising rates through the end of the year. But others said the Fed would bump the rate up to 3.75 percent this month but wait until the hurricane's economic impact becomes clearer before determining how to act at the next two meetings. Critical details include how long oil refineries will be unable to operate or how high gasoline prices will go and for how long.
"We should not rule out a shift in [Fed] policy before the end of the year," former Fed board member Laurence H. Meyer, vice chairman of Macroeconomic Advisers LLC, wrote in a note to clients.
Greenspan's fans have noted that his response to the 1987 stock market crash and other challenges has resulted in a pretty successful record. Inflation, interest rates and unemployment are lower now than when he started the job. The nation has suffered just two mild recessions during his 18-year tenure, separated by the longest peacetime expansion in history.
But some critics have suggested that his successes have encouraged some investors to take bigger risks because they think he can and will act to save them from every downturn.
Greenspan responded to the 1987 crash by issuing a one-sentence statement assuring that the Fed would provide enough cash to keep the economy and financial system operating, and by lowering interest rates with a rapid series of cuts. He was credited with calming the markets and helping trigger a recovery.
His reputation grew when Greenspan was the most prominently featured member of the "Committee to Save the World," as a 1999 Time Magazine cover story dubbed him, Treasury Secretary Robert E. Rubin and his deputy Lawrence Summers after they had worked closely together to calm international financial markets roiled in 1997 and 1998 by a series of currency crises.
"Greenspan to the Rescue," was the headline on the April 2001 cover of the Economist Magazine, largely summing up his public image at the time when the Fed was cutting interest rates following the bursting of the late 1990's stock market bubble.
Earlier this year, long-term interest rates, which are determined by financial markets, fell on speculation that a brief softness in consumer spending would persuade the Fed to slow its rate increases. Long-term rates, such as those influencing mortgages and corporate borrowing costs, plunged this week on speculation that Katrina will prompt such a response.
Bush and Greenspan met yesterday at a time of "transition at the Fed, a possible transition in the White House economic team, and arguably a transition in the economy as oil prices start to bite," said Nicolas Checa, a managing director at Kissinger McLarty Associates, an international advisory firm. The president "needs a credible voice on economic policy and no one can trump Greenspan there."