Federal Reserve Chairman Alan Greenspan said today that global economic growth will be slowed by the increase in energy prices caused by hurricanes Katrina and Rita.
"Although the global economic expansion appears to have been on a reasonably firm path through the summer months, the recent surge in energy prices will undoubtedly be a drag from now on," Greenspan said in his first public comments about the storms' economic effects.
The Fed chairman, speaking to Japanese executives in Tokyo, echoed the forecasts of many analysts, who have predicted that higher energy costs will force many consumers to curtail spending on other items and may cause some businesses to shelve expansion and hiring plans. A text of his remarks was made available in Washington.
Greenspan did not predict the magnitude of the drag on growth. But he did say that "the effect of the current surge in oil prices, though noticeable, is likely to prove significantly less consequential to economic growth and inflation than the surge in the 1970s." In that decade and in the early 1980s, high oil prices contributed to double-digit-percentage inflation and economic sluggishness -- together labeled "stagflation."
Greenspan did not comment on the probable effects of higher energy prices on inflation or the Fed's plans to raise short-term interest rates enough to keep a lid on prices for non-energy items -- both issues of intense interest to financial markets.
Greenspan said the storms hit at a time when "world oil markets had been subject to a degree of strain not experienced for a generation." Oil prices had been rising since 2002 as global economic growth caused energy demand to grow faster than supplies. The hurricanes slammed into the Gulf Coast in late August and September, shutting down and disabling oil rigs, refineries and pipelines. Energy prices soared 12 percent in September -- the fastest rate since the government began collecting data in 1957 and contributing to the highest monthly consumer inflation rate in 25 years.
The balance of world energy supplies and demand, he said, "is so fragile that weather, not to mention individual acts of sabotage or local insurrection, could have a significant impact on economic growth."