At Arm's Length - Financial Commentary about Money, Investing, and How It Affects the Average Investor

At Arm's Length: 09.13.05

The Next Move

As we all know by now, the crisis that struck Louisiana and states adjacent is unprecedented. For more reasons than the obvious, the effects of that storm on the next several months goes far beyond the contract grab by the administration's favorite companies, far beyond the rebuilding and restoration of the storm ravaged areas, and far beyond the costs incurred on a federal budget that is in no position to add to the already record deficit.

Next week, the Federal Open Market Committee convene to discuss whether they should increase the overnight lending rate another quarter of a point to 3.75%. There has been quite a lot of chatter from Fed members about the possibility of inflation picking up speed as a result of the Hurricane Katrina. Bear in mind that these bankers care only about core inflation, a measure that excludes fuel and food.

For the rest of the real world, those of us that are seeing prices rise steadily at the grocers and the pumps. Folks are beginning to make decisions on which of these two much higher items is worth paying.

If the Greenspan does decide to raise rates, it will be the first time the Fed has done so during a crisis, another indication that the rates were too low for too long and the Fed chief is beginning to worry about the economy he has been leading. There will be plenty of time next year to pick up the pieces but until then, we are left with wondering why.

Perhaps the Fed doesn't want to create a panic. That would certainly be a possibility if they announced that the economy could be hurt, at least in the short term by the effects of the storm. But it will be difficult to determine.

This week is full of reports that help stocks and bonds trade. Numbers on Producer and Consumer Prices, industrial production and current account balances are usually met with a good deal of anticipation by the markets. unfortunately, those numbers, because they reflect an economy pre-Katrina, mean little.

The effects of a measurable loss of $40 billion in GDP, the Gulf's contribution to the nation will not be calculated until next year. Until then, the markets are hoping that the Fed brakes after next week and begin releasing money back into an economy that is now on a very short string.

The previous week's articles.

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