Fed Economist: Katrina Won't Change Monetary Policy

WASHINGTON – Hurricane Katrina's damage to U.S. economic growth will likely be short-lived and won't change the underlying dynamics for which the Federal Reserve (search) has set monetary policy, a senior Fed economist said Tuesday.

"It is a supply shock now, as opposed to the normal energy situation we've been experiencing, which is more demand driven," said Robert Eisenbeis (search), Director of Research at the Federal Reserve Bank of Atlanta (search).

"And we think that the supply shock is going to be temporary at this juncture. We think that over the longer haul, it doesn't look like anything has changed."

The Atlanta Fed oversees the Louisiana, Alabama and Mississippi regions struck by the storm and its economists have been working flat out to assess the impact on the economy.

Katrina severely disrupted the U.S. oil industry, sending gasoline prices soaring to well above $3 a gallon in some places, while the harm to the New Orleans Port and Mississippi River inland waterway also hit commodity prices.

Markets bet the Fed will pause a year-long campaign of steady rate hikes and lift the overnight funds rate by only one more quarter percentage point this year, to 3.75 percent, to give the economy a chance to recover.

Economists paid to analyze the Fed are split. Some see it pausing briefly at its next policy meeting, on Sept. 20, while others think it will be extremely reluctant to abandon its careful strategy of tightening policy at a measured pace.

Eisenbeis, a top adviser to Atlanta Fed President Jack Guynn (search) who regularly attends meetings of the policy-setting Federal Open Market Committee, sounded as if he stood in the second camp.

"You cannot lose sight of the human tragedy... But on the other hand, from the economic perspective, it's important to strike the appropriate balance," he said.

A Reuters poll of economists last week saw Katrina slicing 0.4 of a percentage point off U.S. gross domestic product growth in the fourth quarter and estimates of the economic cost of the storm range from $14 billion to $30 billion.

Eisenbeis said any damage estimates at this stage were guesswork, but he did not fear a big hit for national growth.

"The key will be if there are spillover effects of a very significant nature to spending of people across the country who weren't directly affected by the hurricane," he said.