Katrina Spurred Fed Worries About Inflation

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The New York Sun

Federal Reserve policy makers grew more concerned about inflation after Hurricane Katrina and said interest rates probably will have to move higher to restrain prices,minutes of the central bank’s September 20 meeting showed.


The policy-making Federal Open Market Committee said “upside risks to inflation appeared to have increased” after the storm ripped into the Gulf Coast on August 29 and expected that “further rate increases probably would be required.” The Fed voted 9-1 last month to raise its main lending rate for the 11th straight time, to 3.75%, the highest in four years.


The report doesn’t show dissatisfaction with last month’s rate increase by committee members other than Governor Olson, whose dissent marked the first contested vote under Chairman Alan Greenspan in more than two years.The minutes also suggest the Fed may be preparing to change policy language that says rates may continue to rise at a “measured” pace.


“Participants’ concerns about inflation prospects generally had increased” since August 9, the minutes said. Leaving the main rate unchanged “had the potential to mislead the public both about the Committee’s perceptions of the fundamental strength and resilience of the economy and about its commitment to fostering price stability.”


The Fed has used the “measured”language to telegraph its rate intentions since May 2004. The minutes released yesterday pointed to a possible shift.


The New York Sun

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