Fed Governors Still See Strong Economy

The U.S. economy is likely to remain strong after Hurricanes Katrina and Rita pummeled the Gulf Coast, two Federal Reserve officials said Monday.

That view was consistent with results of a survey of economists, released Monday, that said Katrina slowed U.S. economic growth by less than half a percentage point, suggesting that the storm was a smaller hit to the economy than government officials and some forecasters initially estimated.

“It’s early to see the results of Rita, but I think the fundamentals of the economy are strong,” Michael Moskow, president of the Federal Reserve Bank of Chicago, told reporters after a speech to the National Assn. for Business Economics. In Washington, Fed Gov. Susan Schmidt Bies said she still saw “resilience in the economy” and added that rebuilding would provide a boost.

The comments by two voting members of the Federal Open Market Committee suggest that the Fed’s policy of raising interest rates at a “measured” pace to preempt a surge in inflation remains intact after the storms.

The economy will keep growing at a 3% annual pace or faster over the next year and a half, according to the survey of economists, released at their conference in Chicago on Monday.

Bies said that rising energy prices after the storm might hurt other types of consumer spending, and “the longer prices stay higher the more likely there will be an impact on prices in general.” She spoke to reporters after a presentation to the Institute of International Bankers.

“I think we’re at the high end of the comfort zone of price stability,” Moskow told reporters after his speech. The comments were similar to those he made in a Sept. 7 speech when he said inflation excluding energy and food was “at the upper end of the range that I feel is consistent” with stable prices.

The Federal Open Market Committee raised its benchmark rate a quarter of a point to 3.75% on Sept. 20, saying the economy faced only a “near-term” setback after Katrina. The Fed has raised rates at 11 straight meetings.

The U.S. economy will expand at an annual rate of 3.5% in the current quarter before slowing to a 3% expansion rate in the fourth quarter, according to 43 economists surveyed from Aug. 31 to Sept. 7, which was after Katrina but before Rita. The storm will trim economic growth by 0.4 percentage point in the third quarter and 0.2 percentage point in the fourth, the economists said.

The survey suggests that the effect of Katrina was smaller than some economists initially expected. The Congressional Budget Office this month said the storm would slash economic growth by 0.5 percentage point to 1 percentage point in the second half of 2005. Economists at Global Insight and Goldman Sachs Group Inc. cut their forecasts by a percentage point or more after the storm.

“Our panel sees a relatively modest and short-lived negative economic impact” from Katrina, said Stuart Hoffman, National Assn. for Business Economics vice president and chief economist at PNC Financial Services Group in Pittsburgh. “This energy price shock is certainly expected to moderate but not expected to derail the economic expansion.”

The economy will expand 3.4% in 2006 as consumer spending growth moderates and government spending surges, the survey said.

“At this point, we’re still seeing underlying core resilience in the economy, and all of the rebuilding that’s going to be required is also going to show up in the economic numbers once we get through the initial impact,” Bies said.

The Fed has been raising rates for more than a year to keep inflation in check as a growing economy pushes joblessness to a five-year low and oil prices surge to records. The economy grew faster than 3% the last nine quarters, and the consumer price index rose 3.6% over the last 12 months, the biggest gain in four years.

Economists at the National Assn. for Business Economics said the Fed would raise the benchmark federal funds rate to 4% by December. The central bank will then raise rates just half a percentage point in 2006 to 4.5%, the economists said.

Forecasters are just beginning to update their outlooks to take Hurricane Rita into account.

The Fed will monitor the effects of Rita, though for now the news doesn’t look bad for the national economy, Bies said.