Feds Raise Rate, See Katrina Impact as 'Near-Term' Only

NEW YORK CITY-In the 11th consecutive quarter-point increase, the Federal Open Market Committee has raised the benchmark federal funds rate from 3.5% to 3.75%. In a statement on the increase, the committee says that “output appeared poised to continue growing at a good pace before the tragic toll of Hurricane Katrina. The widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term.” The committee notes that higher energy and other costs have the potential to add to inflation pressures.

“It’s no surprise,” says Gary Gabriel, executive director of financial services at Cushman & Wakefield. “We view the Katrina storm to be more of humanitarian tragedy than an economic tragedy. It has very localized impact.” He agrees that there is the risk of inflation due to government stimulus that will be put in place to rebuilding the Gulf Coast region. “Consumer confidence is down, but once they see region on the mend, the country will get back to doing its business.”

The National Association of Realtors says the storm’s impact will “cause the economy to grow more slowly than in earlier projections, but the economy will get a lift once rebuilding gets under way.” The US gross domestic product is forecast to grow at a pace of 2.3% in the third quarter and 2.7% in the fourth quarter, with GDP for all of 2006 pegged at 3.8%.