Guynn Discusses Economic Impact of Hurricanes and Monetary Policy

For immediate release: October 20, 2005

ATLANTA—Federal Reserve Bank of Atlanta President and Chief Executive Officer Jack Guynn spoke today about U.S. economic growth following Hurricanes Katrina and Rita as well as the inflation outlook for the nation.

In his remarks, Guynn said that the economy moved into the summer months before the storms with solid GDP growth and a strong labor market. While noting that the hurricanes were devastating to the Gulf region and caused significant damage to the nation’s energy infrastructure, Guynn said that from a national perspective the storms have not significantly altered the mostly positive economic path over the long term. But Guynn did cite the emergence of new uncertainties in the short term related to business and consumer spending and elevated energy prices, and he urged caution with interpreting data collected following the storms, saying that many of these risks will likely turn out to be transitory. “There is good reason to believe our economy will keep adjusting in ways that make low and stable inflation and continuing growth the most likely outcomes.”

Guynn noted that rising energy costs will likely have an effect on prices. “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.” But he added that other factors, such as increasing competitive pressures and the Fed’s approach of gradually removing monetary policy accommodation, are working to contain price pressures. “Although it’s difficult to judge how much of the current inflation risks will ultimately become realized in core inflation in the coming months, I’m reasonably confident that today’s inflation pressures—as with much of the fallout from the hurricanes—will turn out to be mostly temporary.”

Guynn stressed the importance of preventing the emergence of inflation expectations, noting that “even more important than price readings is how individuals and businesses perceive the likely path of inflation.” He said 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 in 15 months. “With indications emerging that the economic expansion would continue even after the hurricanes, our FOMC chose to take a longer-term view and to continue on the path of removing the monetary policy accommodation that was no longer needed.” He said he believes policy is still accommodative, adding “So I believe 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.”

A transcript of Jack Guynn’s remarks is available on the Atlanta Fed Web site.

The Federal Reserve Bank of Atlanta serves the Sixth Federal Reserve District, which encompasses Alabama, Florida, Georgia and parts of Louisiana, Mississippi and Tennessee. As part of the nation’s central banking system, the Atlanta Fed participates in setting national monetary policy, supervises numerous commercial banks and provides a variety of financial services to depository institutions and the U.S. government.


Text of speech

Contact: Marc Fordham 404-498-7324