Atlanta Fed President Discusses Hurricanes, Economic Growth, and Energy
Despite the impact of Hurricanes Katrina and Rita, the U.S. economy should continue to grow and experience low, stable inflation, according to Atlanta Fed President and Chief Executive Officer Jack Guynn.
Speaking in Atlanta to a group from the Enterprise Institute on Oct. 20, Guynn said that before the storms the economy exhibited solid performance as gauged by the gross domestic product and labor market. While the hurricanes devastated the Gulf region and significantly damaged the nation’s energy infrastructure, they did not materially alter the mostly positive long-term national economic path. But Guynn sees new, short-term uncertainties emerging related to business and consumer spending and elevated energy prices.
Fuel costs and inflation containment
Rising energy costs will probably have a short-term impact. “Businesses will likely reach the limit when they can no longer absorb all of the higher costs, and there will be additional pressure to increase prices,” Guynn said. But other factors, such as increasing competitive pressures and the Fed’s policy of gradually making monetary policy less accommodative, should work to contain inflation and inflation expectations.
As evidence that inflation risks remain contained, he noted that the core consumer price index (CPI) measure of inflation, which excludes food and energy, increased 2 percent in September compared with the year-earlier level. While this rate is significantly lower than the overall CPI, core CPI is about the same as it was in early 2005 and is at the upper end of what Guynn views as the acceptable range. Despite the elevated inflation risks, he is confident that the price pressures will turnout to be temporary.
“Even more important than price readings is how individuals and businesses perceive the likely path of inflation,” Guynn noted. He supported the Federal Open Market Committee’s decision in September to raise the fed funds rate target to 3.75 percent, the eleventh rate hike since June 2004, but he believes monetary policy is still accommodative. “The continued removal of that monetary accommodation is appropriate for now. And I will submit that our gradual course has been far preferable to pausing and risking more drastic—and painful—moves later.”