The bond and futures markets have shifted the odds of a further move by the US central bank, which has implemented 10 quarter-point increases as part of a gradual effort to normalize interest rates.

Yields on the bond market have fallen since the storm tore through the southeast as investors bet on a weaker economy.

The fed funds futures market is now priced for a 76 percent chance the Fed's target interest rate is lifted to 3.75 percent from 3.5 percent when the Fed meets September 20, down from a 90 percent chance earlier this week and 100 percent odds priced in last month.

Merrill Lynch chief economist David Rosenberg suggested that the Fed may stop its rate-boosting cycle immediately in the face of the disaster.

"We are clearly in a state of economic uncertainty and the prudent thing to do in such times is to do nothing at all," Rosenberg said. "The economy was already clearly losing momentum heading into Katrina."

Rosenberg said the fact that Fed chairman Alan Greenspan met with President George W. Bush after Katrina hit last week was significant.

"It is basically a subtle way to flash to the market that the negative economic consequences are resonating and that the Fed may not just look at this as a temporary soft patch this time," Rosenberg said.

Some analysts agree, arguing that Greenspan does not want to risk pushing the US economy into recession before he retires in January.

"The interest-rate markets have moved to swiftly price in one last act of enlightened risk management from Fed chairman Greenspan in the form of a tightening pause," said Michael Wallace, economist with Action Economics.

Katrina has been so devastating because aside from leveling New Orleans and the surrounding area, it affected major oil refineries, ports, pipelines and highways connecting the region to the rest of the country.

The surge in energy costs threatens to divert tens of billions of dollars from consumers and dent spending on other items, thus crimping economic growth.

But a number of economists dispute the argument that the Fed should shift gears immediately.

Lehman Brothers economist Ethan Harris said "the markets have forgotten two lessons from prior natural disasters," referring to Fed action in the case of two major California earthquakes in recent years.

"The national economy usually weathers these storms with relatively minor damage," Harris said.

Harris said the devastating floods brought by Katrina represent a "supply shock" that may raise prices and not a "demand shock" that will harm long-term growth.

"In the past the Fed has approached supply shocks with a jaundiced eye," he said.

Other analysts say Greenspan and company will wait to see how quickly the disaster recovery proceeds and whether energy prices will settle to a less punishing level.

Among the few comments from the central bank, Philadelphia Fed President Anthony Santomero said Katrina's impact "may slow the rate at which the economy will grow for a time, but the expansion is strong enough to withstand them."

Nariman Behravesh, chief economist at research firm Global Insight, said the special circumstances of this event -- crimping the US energy industry and the major commodity port at New Orleans -- mean "a large national economic impact" that will shave between 0.5 percent and 1.0 percent from growth in the third and fourth quarters.

"The uncertainty about the damage from Katrina will make the Fed's task far more complicated," Behravesh said.

He argued that "at most, the Fed will hike the federal funds rate another 25 basis points before the end of the year, probably at the September meeting."

After that, the economist said, "Mr. Greenspan and his colleagues are likely to take a 'wait and see' attitude for a couple of meetings."

earlier related report
Katrina's Fury Ripples Far And Wide Through US Economy
by Jitendra Joshi
Washington (AFP) Sep 04 - Could a debilitating slowdown to the world's biggest economy be the final sting in Hurricane Katrina's long and deadly tail?

Much of the answer depends on how well US consumers weather the shock of sky-high gasoline prices brought about by Katrina's impact on vital oil installations.

While economists are still calculating the extent of the wider damage wreaked by one of the most powerful storms to hit US soil, the government says the repercussions will be limited.

Treasury Secretary John Snow said the US economy would see "somewhat slower growth" for a few months.

"Clearly this will be a challenging time for the economy. The fortunate thing is that the economy is performing so well," he told reporters late Friday after talks with Federal Reserve chairman Alan Greenspan.

Economists are divided about whether the Fed, in light of Katrina, will pause on its year-long campaign of hiking US interest rates to curb inflationary pressures triggered by record-high oil prices.

But if history is a guide, many pundits say, Greenspan will take a "safety first" approach and defer another rate hike this month as the full force of Katrina plays out.

What Greenspan and other leaders will be anxiously awaiting is how US consumers, whose spending powers two-thirds of the economy, weather the storm.

In terms of direct economic impact, the worst-hit states of Louisiana, Mississippi and Alabama contribute just three percent of total US gross domestic product.

But the region is a vital shipping hub for US agricultural and industrial exports, and a host of imports including crude oil, and it is at the mouth of the Mississippi River, the lifeblood of the midwest economy.

In shutting down a swathe of ports along the Gulf Coast, including the inundated city of New Orleans, and up to 20 percent of US refinery capacity, Katrina's fury has been felt far beyond the area in its immediate path.

The hurricane has snarled up bulk cargos such as grain, steel, lumber, coffee, rubber, copper and chemicals that normally transit through New Orleans.

"Katrina is very big and, in economic terms, very deep," Cumberland Advisors chairman David Kotok said.

Risk Management Solutions, a consultancy, predicts total losses from Katrina could top a mammoth 100 billion dollars, while economists see the cumulative hit knocking half a percentage point of US growth in the next quarter.

The immediate impact has been seen on gasoline (petrol) prices, always a sensitive issue in a nation so passionately devoted to the automobile.

National gasoline prices are averaging a hitherto-unimaginable three dollars a gallon (3.78 litres). Motorists' groups have reported panic buying and huge queues at petrol stations well beyond the hurricane zone.

Americans aren't about to abandon their cars, and are saving next to nothing, so the extra money to fill up tanks will have to be diverted from other spending.

"This could be the straw that breaks the consumer's back," said Michael Niemira, chief economist for the International Council of Shopping Centers.

Bernard Baumohl, executive director of the Economic Outlook Group, said: "The stress on household finances in coming weeks will be the greatest since the last recession in 2001.

"Workers not only face a surge in gasoline and heating costs, but also higher interest payments from record levels of credit card, home equity loans and mortgage debt."

However, not everyone is convinced that Katrina will bring lasting damage to the economy. Gasoline prices should find relief as oil refineries and pipelines from the Gulf Coast limp back to life, while the United States and its industrial partners are preparing to flood the markets with emergency crude supplies.

Several economists noted that after past natural disasters, spending has bounced back strongly as a reconstruction boom kicks in.

"The 2004 hurricane season did not deter the Fed from its course, and neither have rising energy prices," Claymore Advisers senior economist Brian Mulvihill said.

"Katrina will cause a loss of jobs and output, but rebuilding and rescue efforts will add to GDP. We estimate that the impact on the overall growth rate of the economy will be small," he said.

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