Post-Storm Rate Cut Not a Given

Article excerpt

Byline: Henry Savage, SPECIAL TO THE WASHINGTON TIMES

Disasters always have some economic effect that may or may not influence lending rates. Hurricane Katrina and the September 11 attacks - two of the nation's most recent and most profound catastrophic events - are no different.

After the September 11 attacks, the Federal Reserve Board made it clear that it would use whatever powers necessary to assuage its economic damage. In fact, the Fed reduced short-term interest rates four times in the three months after the attacks, cutting the federal funds rate in half, from 3.50 percent to 1.75 percent.

The moves helped spur a sharp drop in mortgage rates, creating a housing and refinancing boom. The effects of these are felt to this day.

After Katrina hit, the Fed has remained silent, even though the potential detrimental economic side effects of Katrina could be far worse than September 11.

Why?

After some research, I now understand why the Fed has not jumped to lower rates in the Katrina's aftermath. Let's compare the two events.

When the terrorists attacked, the U.S. economy was already close to recession levels. Annualized growth in the third quarter of 2001 was less than 1.5 percent. This compares to a healthy 3.5 percent level in 2005.

Healthy growth numbers might be good for wages and employment, but they can also bring about inflation, and Fed Chairman Alan Greenspan is not about to lower rates if it will risk inflation.

But what about the job loss created by Katrina? The forecast is currently running in the 400,000 range. Surely such a hit in the job market won't overheat the economy.

Some experts say otherwise. …