The Federal Reserve (search) will face "a number of judgment calls" in assessing the impact of Hurricane Katrina (search) on the U.S. economy, Chicago Federal Reserve Bank President Michael Moskow (search) said Wednesday.

More broadly, the central bank needs to continue "appropriate monetary policy" to keep inflation well contained, he said in remarks to the Futures Industry Association.

Moskow, a voting member of the Federal Open Market Committee (search) this year, said higher core inflation, higher energy prices and the potion running at the upper end of the range that I feel is consistent with price stability," Moskow said, echoing comments he made Aug. 24.

Inflation risks are higher now than a year ago because the U.S. economy is running nearer to full potential, making unfavorable cost developments more likely to feed through to core inflation, he said.

If expectations of higher inflation become ingrained, "the Fed would need to respond accordingly in order to restore price stability," Moskow said.

High energy prices pose both a risk to growth and a threat of higher inflation, he said.

Moskow was the first central banker to address Katrina's impact at length since the storm hit on Aug. 29.

"At this time it's very difficult to say how the national economy will be affected" by Katrina, he said.

The hurricane — which flattened much of the U.S. Gulf Coast and flooded New Orleans — brought a scale of destruction clearly larger than other storms of recent memory because of the damage to energy and transportation infrastructure concentrated in the area, Moskow said.

The Fed's 7th district includes many of the biggest U.S. grain exporting states, which move millions of tons of corn and soybeans down the Mississippi River to huge export facilities at the Gulf of Mexico.

"Participants in the markets are working actively to figure out alternative distribution routes and alternative transportation systems to move their products," Moskow said.

Market expectations on Fed policy have shifted after the hurricane as economists mark down growth forecasts for 2005. At the same time, some are raising their 2006 estimates because of the huge rebuilding that lies ahead.

Moskow refused to comment on how the FOMC would respond to Katrina, saying its decision-making process would follow the same guidelines as usual. "We continue to look at all the data," he said.

Moskow noted that "some forecasters" have trimmed projections for real gross domestic product growth for the second half of 2005 by 0.3 to 0.5 percentage point, without endorsing such an outlook.

Some dealers think the Fed will pause its program of "measured" rate increases at the Sept. 20 FOMC meeting, giving it time to assess the hurricane's economic shock.

Futures prices slipped after Moskow's remarks, pushing the chances of a September rate increase back up to 80 percent from 66 percent earlier Wednesday.

Addressing concerns that U.S. productivity growth may be slowing, putting upward pressure on unit labor costs, Moskow said trend should remain solid.

"I still believe trend productivity growth is in the vicinity of 2.5 percent," he told reporters.

Earlier Wednesday, the U.S. government cut its estimate of second-quarter productivity growth to a 1.8 percent annualized rate, from 2.2 percent previously.

Moskow also said any softening in the housing market or in home prices would hit the economy slowly, giving policy-makers "time to react and take action."