The Federal Reserve raised interest rates again Tuesday (Sept, 20), saying Hurricane Katrina could fuel inflationary pressures but does not pose a persistent threat to the U.S. economy, according to CBS MarketWatch.
The 9-1 vote to increase the federal funds target rate by a quarter percentage point to 3.75% leaves the key interest rate at its highest level since June 2001. Gov. Mark Olson dissented at the meeting, voting to hold rates steady.
The benchmark prime rate, a key lending index to both recreational vehicle dealers and consumers, is expected to follow with a corresponding quarter percentage point hike to 6.75%,
In its statement, the Fed said, “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 added, “While these unfortunate developments have increased uncertainty about near-term economic performance, it is the committee’s view that they do not pose a more persistent threat.”
The Fed alluded to “higher energy and other costs having the potential to add to inflation pressures.” However, the committee said that core inflation was low and longer-term inflationary pressures were contained.
Markets expect one or two more rate hikes from the Fed before the end of the year, but the FOMC gave no indication that it’s done. The committee said current rates remain “accommodative” and suggested again that rates could be raised at a “measured” pace.
Despite pleas to wait and see what impact the most devastating storm in U.S. history would have on growth and inflation, policymakers concluded that a rate hike could not wait, lest inflationary pressures grow.
Fed chief Alan Greenspan is scheduled to discuss the economic outlook in a speech to the annual meeting of the National Association of Business Economics in Chicago on Sept. 27.