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Thursday, September 01, 2005

Philadelphia Fed’s Santomero: Rates are Still Likely to Go Up

Fed officials are signaling that the effect of Hurricane Katrina on monetary policy will depend upon how long-term the economic consequences of the hurricane are, but if this is a transitory event, rates will continue to increase at a measured pace.  Anthony Santomero, president of the Federal Reserve Bank of Philadelphia, believes the effects will be transitory and that rates will continue to increase at a measured pace.  If there are long-term economic consequences, then the officials interviewed in this report would not predict how policy might be affected:

Economy Can Withstand Hurricane, Fed's Santomero, Bloomberg:  The U.S. economy will withstand the effects of Hurricane Katrina, rising fuel costs and a slowdown in the housing market, allowing the Federal Reserve to keep raising interest rates at a ''measured'' pace, said Anthony Santomero, president of the Federal Reserve Bank of Philadelphia. ''If the economy evolves as I expect, it is likely that we can continue to move the federal funds rate toward neutrality at what we have described as a measured pace,'' … Santomero said U.S. economic growth may slow ''for a time'' because of the effects of higher oil prices, the housing market and the hurricane ... Even so, ''the expansion is strong enough to withstand them''…

Santomero's remarks were the first by a Fed official since the hurricane struck two days ago. Asked in an interview after his speech if the hurricane's effects might prompt the Fed to pause with its rate increases, Santomero said ''we still have to figure out'' the storm's economic effects. ''It's clearly something we have to look at, we have to be mindful of,'' Santomero ... ''We have to if necessary adapt to changing circumstances, but we don't know to what extent this is a serious disruption or a relatively short-term one,''…

Other Fed officials later offered similar views. Fed Governor Mark Olson said that ''it's too early to even make a comment'' on how Hurricane Katrina will affect the U.S. economy. Asked how long it will take the Fed to assess the storm's effect, Olson said, ''It's still in the early stages. We'll watch the information as it becomes available.'' When asked about the storm's effect on the economy, Janet Yellen, president of the Federal Reserve Bank of San Francisco, said, ''We have to watch things and see what happens.''…

And, in closing, Santomero reminds us that the Fed takes monetary policy one meeting at a time and uses the very latest information available to guide their decisions, then tells us what he expects the data to say:

…''The Fed's best strategy is to keep careful watch on economic developments, approach each policy decision with an open mind, and communicate the rationale for its decisions as clearly as possible,'' Santomero said. … Santomero said the economy will expand by 3.5 percent to 4 percent this year. Payroll growth will continue to average 150,000 to 200,000 jobs a month, though ''with the unemployment rate at 5 percent, we must also begin to ask how much slack remains in the labor market,'' he said.

If he’s right, rates are going up.

    Posted by on Thursday, September 1, 2005 at 12:42 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (6)

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