If Federal Reserve policymakers had to vote today, they'd probably raise short-term interest rates a notch out of concern that Hurricane Katrina could harm the U.S. economy more by boosting inflation than by slowing growth.
But they don't have to vote until their meeting Sept. 20 and could well leave their benchmark rate unchanged if consumer spending plunges, businesses shelve hiring plans or if national economic conditions remain unclear.
Some Fed officials remain undecided because of uncertainties over how consumers will react to $3-a-gallon gasoline, how high gas prices will stay for how long, how quickly Gulf Coast energy production will be restored, and how successful companies will be in raising prices to cover higher energy costs.
Policymakers will use the next 10 days to gather information from companies, industries and individuals about how Katrina's effects are rippling through the economy.
"While recent indicators provide room for optimism, we are still at an early stage in the process of assessing the effects of the hurricane," Janet L. Yellen, president of the Federal Reserve Bank of San Francisco, said in a speech Thursday.
An important part of the Sept. 20 meeting will be the presentations on regional conditions by the presidents of the 12 Federal Reserve banks, which operate local branches and confer with businesses in their districts.
The session will probably involve more debate than recent meetings, during which policymakers easily agreed to keep raising their benchmark rate, analysts said. And Fed officials might issue a longer statement after the meeting, explaining their action and their view of Katrina's economic effects.
The Fed's quandary is that the storm sent energy costs soaring, which both slows economic growth and fuels inflation. The central bank can counter a downturn by lowering interest rates, which stimulates spending. Or it can fight inflation by raising rates, which further dampens demand.
Katrina hit as energy prices were high and the Fed's benchmark federal funds rate -- the overnight rate on loans between banks -- was low at 3.5 percent. Central bank officials have said the economy no longer needs the extra stimulus of easy credit, and they have raised the rate 10 times in the past 15 months to keep inflation under control.
After their last meeting, on Aug. 9, Fed officials indicated that the rate was still too low and would be raised further in coming months at a gradual pace. Futures contracts reflected expectations that the rate would rise to 3.75 percent at the September meeting, and twice more to 4.25 percent by year-end.
After Katrina struck, many analysts predicted that the Fed would pause until the risks become clearer. "We now expect the [Fed] to take a one-off break from its rate hike campaign on Sept. 20 as an insurance policy against a worse-than-expected impact from Katrina," Goldman Sachs US Economics Research said yesterday in an analysis for clients.
But some Fed officials have suggested publicly that they favor continuing to raise the rate to a level that would not stimulate growth or inflation. They expressed concern about inflationary pressures and confidence in the economy's ability to absorb the storm's effects.
Katrina's impacts "may slow the rate at which the economy will grow for a time, but the expansion is strong enough to withstand them," said Anthony M. Santomero, president of Federal Reserve Bank of Philadelphia, in a speech Aug. 31. "It is likely that we can continue to move the Fed funds rate toward neutrality at what we have described at a measured pace."
Michael H. Moskow, president of the Federal Reserve Bank of Chicago, surveyed Katrina's likely effects in a speech Wednesday and expressed concern that inflation was at the high end of his comfort range. He worried that higher prices might fuel self-fulfilling consumer expectations of higher inflation.
"Even without an increase in inflation expectations, it will take appropriate [interest rate] policy to keep inflation well contained," Moskow said.
The economy has grown at about a 3.5 percent pace over the past year, modestly above average. Many analysts estimate that Katrina has wiped out hundreds of thousands of jobs and will shave about half a percentage point off the annualized growth rate in the second half of the year. But they also predict that the reconstruction will create jobs and boost growth next year.
The Fed's optimists say they are encouraged that businesses are finding ways to work around some of the storm's effects by rerouting shipments and locating alternative supplies of goods.
Oil- and gasoline-production facilities are being repaired. Oil prices fell to around $64 a barrel yesterday, near their level before the hurricane. Gasoline prices have stabilized, with the national average slipping to $3.02 per gallon yesterday from a peak of $3.06 on Labor Day, according to the AAA auto club.
Stock prices are up since the storm. Long-term interest rates, which are determined by financial markets, are lower than before the hurricane, providing additional stimulus. Rates are down both because investors speculate that the Fed may pause its rate increases and because they do not foresee higher inflation.
Fed Chairman Alan Greenspan has not spoken publicly since the hurricane hit. But President Bush and Treasury Secretary John W. Snow remarked after meeting with Greenspan last week that they expect the storm to dampen economic growth only temporarily.
Yellen also sounded upbeat. Even after Katrina, she said, "the economy overall . . . is doing reasonably well."