US Fed boosts rates, downplays Katrina fears
(AP)
Updated: 2005-09-21 09:13

The US Federal Reserve boosted interest rates to the highest level in four years Tuesday despite the effects of Hurricane Katrina, saying fallout from the storm didn't pose a "persistent threat" to the nation's economic health.

The Fed made clear that fighting inflation remained its No. 1 job.

Taking no break in a 15-month rate-raising campaign, as some had speculated, Fed Chairman Alan Greenspan and his colleagues opted to raise an important short-term interest rate by one-quarter percentage point to 3.75 percent. It marked the 11th increase of that size since the Fed began to tighten credit in June 2004.

In response, commercial banks began raising their prime lending rates by a corresponding amount, to 6.75 percent. These rates are used for many short-term consumer loans, including some credit cards and popular home equity lines of credit.

The increases pushed borrowing costs to their highest level since the summer of 2001.

On Wall Street, stocks fell. The Dow Jones industrials lost 76.11 points to close at 10,481.52.

Fed policymakers held the door open to additional rate increases in the months ahead — depending on how economic activity and inflation unfold.

Much of the Fed's brief statement — issued after its closed-door meeting — was devoted to looking at the economic impact of Katrina, which slammed the Gulf Coast in late August, knocking out essential oil facilities and destroying businesses, homes and lives.

Federal Reserve Board Chairman Alan Greenspan testifies on Capitol Hill before the Senate Banking Committee in this Feb. 24, 2004 file photo. [AP/file]

High energy prices made worse by the storm "imply that spending, production and employment will be set back in the near term," Fed policymakers said. Disruptions to oil and gas supplies may add to energy price gyrations, they said.

Policymakers struck a hopeful tone that such economic fallout would not be long lasting.

"While these unfortunate developments have increased uncertainty about near-term economic performance, it is the (Fed's) view that they do not pose a more persistent threat," policymakers concluded.

Fed policymakers observed that before Katrina struck, the economy was moving ahead at a "good pace. Economists said the Fed was trying to convey the sense that because the economy was in such good shape it should be able to weather reasonably well the jolt from the storm.

Analysts said the economy is resilient and is expected to bounce back.

For now, Katrina is expected to reduce overall economic growth in the second half of this year by as much as 1 percentage point as high energy prices crimp consumer and business spending, vital ingredients for healthy economic activity.

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