Chicago Federal Reserve Bank President Michael Moskow threw water on speculation that the Fed might be considering pausing its program of interest-rate increases to give the economy a breather from Hurricane Katrina's economic damage.
In a speech yesterday to the Chicago division of the Futures Industry Association, Moskow emphasized the need to suppress growing inflationary pressures in the U.S. economy. His comments represented the first formal remarks by a Federal Reserve official since the extent of Katrina's devastation came into focus.
"Putting it all together, I'm concerned about core inflation running at the upper end of the range that I feel is consistent with price stability," Moskow told the audience at the Union League Club.
Moskow's comments indicate that the Chicago Fed chief is "more concerned about rising inflation pressures than slowing economic activity," said Ken Kim, an economist at Princeton-based Stone & McCarthy.
If Americans "start to see a string of higher inflation numbers," Moskow cautioned, households and businesses "may begin to expect permanently higher inflation," thus igniting a potential inflationary surge. "Even without an increase in inflation expectations, it will take appropriate monetary policy to keep inflation well contained."
As he affirmed his focus on containing inflation, Moskow - a voting member of the Fed's interest-rate policy committee - offered no indication that Katrina's economic aftermath had altered the Fed's "measured pace" of rate increases.
Financial market players, reading between the lines, interpreted his comments as a signal that Fed officials will vote Sept. 20 to boost rates by a quarter-point for the 11th straight time.
As of yesterday morning, the futures market was indicating there was a 68 percent chance the Fed will increase rates by a quarter-point at its Sept. 20 meeting, said Asbury Research's John Kosar. After Moskow's speech, he noted, "We're at 76 percent."
Discussing Katrina's impact, Moskow told reporters after his speech that agricultural sources have reported "some congestion in the distribution system" for the fall harvest, but he said they "are working actively to figure out alternative distribution routes."
Of the housing market, Moskow said there is concern that a decline in housing prices from current lofty levels could erode consumer wealth and spending in some parts of the country, as Federal Reserve Chairman Alan Greenspan has repeatedly warned. But he said he has not heard of any such concern in the Chicago area.
Meanwhile, the Federal Reserve's latest "beige book" snapshot of business conditions around the country, released yesterday, said factories were chugging, cash registers were busy and jobs were growing in the late summer - fresh proof that the economy was in fine fettle before Katrina slammed into the Gulf Coast, spreading death and destruction.
The survey of all 12 Fed districts was taken before the hurricane struck last week. The storm knocked out essential oil and gas facilities, choked transportation and shipping, and wiped out businesses and homes.
Now private economists and the Congressional Budget Office predict fallout from the storm will cause overall U.S. economic activity to slow in the second half of this year by one-half to a full percentage point on an annualized basis. Jobs also are expected to take a hit in the coming months.
The Congressional Budget Office is predicting a total of 400,000 job losses through the end of this year. Privately insured losses could exceed $30 billion, and gasoline prices this month will rise much higher than would otherwise have been the case, the agency said.
In another economic report, the Labor Department said yesterday that productivity - the amount an employee produces for every hour of work - rose at an annual rate of 1.8 percent in the April-to-June quarter. That was down from a 3.2 percent pace in the first quarter and was the smallest gain since mid-2004.
Unit labor costs, meanwhile, rose at a 2.5 percent rate in the second quarter, slightly higher than the 2.2 percent growth rate in the prior quarter. Unit labor costs measure how much companies pay workers for every unit of output they produce.
While wage gains are good for workers, a big and sustained pickup in wage growth can raise concerns among economists about an unwanted pickup in inflation.
The Chicago Tribune is a Tribune Publishing newspaper.