In early October, I went to New Orleans to get a firsthand look at the aftermath of Hurricane Katrina. The devastation was widespread, and once-vibrant neighborhoods were practically deserted. But activity is returning slowly to New Orleans, and residents along the Gulf Coast are determined to rebuild. During my visit, I saw many help-wanted signs in and around the city. I am especially proud of our Atlanta Fed staff who managed to secure the New Orleans Branch in September, perhaps the cruelest month in New Orleans’ long history. Today, the branch is again open and serving the Gulf Coast area.
In addition to seeing our efforts to restore operations at our New Orleans Branch, I wanted to gauge in my visit the economic impact of Hurricane Katrina. This powerful storm destroyed major roads, railways, ports, petrochemical factories, energy production and distribution facilities, and other vital infrastructure. Clearly, the task of rebuilding will take years.
From chaos, a pattern emerges
Because our region is located in the hurricane-prone southeastern United States (Katrina, you’ll recall, was followed by Rita and then Wilma, one of the eight hurricanes to hit Florida in the past two years), the Atlanta Fed is all too familiar with the pattern that follows these violent storms. Immediately after a hurricane, there is a significant—but short-term—loss of jobs and income in the affected areas. Then federal government and insurance payments begin to flow, boosting the local economy toward recovery. But even as some areas use the infusion of money to rebuild, it’s impossible to measure the lost opportunities and human costs of such a widespread natural disaster. As of December, we have a clear picture of the U.S. economy, which recovered quickly from the shock of the hurricanes and is continuing to grow at a solid pace. Gross domestic product (GDP) in the third quarter, when Katrina made landfall, was 4.1 percent, a strong performance that follows eight consecutive quarters of GDP growth averaging about 4 percent.
In addition to being a year of record hurricane damage, 2005 will be remembered for sharply rising and volatile energy costs as Katrina and Rita struck at the heart of the nation’s oil and natural gas production and distribution network along the Gulf Coast.
Policy moves anchored inflation expectations
Higher fuel costs added to inflation pressures, and over the course of the year the Fed steadily raised the fed funds target rate to 4.25 percent—policy moves that I believe have helped to keep inflation expectations anchored. Since June 2004, when the fed funds rate target was at a 40-year low of 1 percent, the Fed has moved a long way toward removing policy accommodation, and in the months ahead we’ll continue to evaluate our policy options in response to changes in the economy.
The end of an era—and a new beginning
The next few months also should be a fascinating time of transition for the Federal Reserve as an organization. At the end of January, Alan Greenspan leaves the Fed after 18 years of service as chairman. Part of his legacy is a well-balanced and globally interconnected economy that is likely to continue gaining strength. As we move into 2006, we continue to confront risks that range from potentially volatile energy markets to housing markets that have been appreciating in certain places at rates that I believe are unsustainable for the long term.
The world is an unpredictable place, and some economic shocks cannot be foreseen. But the U.S. economy is in good shape, and I believe we will continue to adjust in ways that make low and stable inflation and continuing job and output growth the most likely outcomes.
This issue of EconSouth provides further insights into how we believe
the national, international, and regional economies will perform in the
coming year.
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