Fed Seen Raising Rates Despite Katrina Blow

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The Federal Reserve (search) seems poised to push through its 11th consecutive hike in U.S. interest rates on Tuesday, notwithstanding the temporary blow to the economy from Hurricane Katrina (search).

A Reuters poll of top Wall Street economists found 18 of 22 predict another quarter-percentage-point increase, to 3.75 percent, as the Fed pursues its "measured" course of tightening monetary policy to head off future inflation.

That compares with four Wall Street houses predicting that the Fed will pause in tightening policy at Tuesday's meeting and wait for a clearer reading of the U.S. economy after the initial shock to the economy of the devastating storm passes.

The Fed officials who have commented since Katrina hit the U.S. Gulf Coast at the end of August have suggested the storm will not significantly damage U.S. economic prospects.

Still, the Reuters poll of economists found the majority expect the U.S. central bank to refrain from lifting rates at least one of its three remaining meetings this year.

An announcement from the Fed is expected around 2:15 p.m. EDT on Tuesday.

So, what will policymakers be considering at the Federal Open Market (search) Committee meeting?

* Fed officials have said that monetary policy is a blunt instrument for responding to a regional natural disaster such as Hurricane Katrina, where fiscal spending can be better targeted. But they will be carefully watching energy prices, which spiked after the storm and have since eased from their peaks, for further inflationary pressure.

* The first readings on post-Katrina economic activity point to a slump in factory activity in the Philadelphia and New York Fed regions. At the same time, costs nearly doubled, fanning inflation fears. The Philadelphia Fed's (search) business activity index dived to 2.2 in September from 17.5.

* Consumer confidence plummeted to a 13-year low in early September, battered by Katrina, according to the University of Michigan's index, which fell to 76.9 in September from 89.1. Economists do not expect a corresponding dive in consumer spending.

* Employment growth has been steady in recent months, with 169,000 jobs added to nonfarm payrolls in August, but there is expected to be a heavy toll on jobs measured in September's report.

* Consumer price increases have accelerated, largely on the back of higher energy costs, although core prices remain tame. In August, the CPI rose 0.5 percent while the core showed a meek 0.1 percent rise. The bigger worry is the outlook.

In several speeches, Fed officials have pointed to broader worries about inflation pressures, rather than focusing on Katrina's impact on economic growth.

"The Fed has and must have a commitment to price stability. The uncertainties on the upside (for inflation) have only gotten bigger since Katrina slammed into the Gulf Coast," said San Francisco Fed President Janet Yellen on September 8.

Chicago Fed President Michael Moskow (search), seen as a centrist on the FOMC, said on September 7 he was concerned about core inflation running at the "upper end of the range" of price stability.

"Even without an increase in inflation expectations, it will take appropriate monetary policy to keep inflation well contained," Moskow said, prompting futures markets to price in a greater chance of further Fed tightening.