Wall Street economists see a chance the Federal Reserve could take a pause from raising interest rates this month in the aftermath of Hurricane Katrina, but few are confident the Fed will stand pat. By contrast, interest rate futures markets are virtually certain the central bank will abstain from tightening at one of its upcoming meetings.
A few courageous economists even ventured to contemplate a potential cut in rates.
"The Fed is on hold indefinitely. It doesn't mean they won't make another move this year but there is too little information to make another rate move in September," said Nomura chief economist David Resler.
"It's not even inconceivable that the next move will be a rate reduction," Resler said. The Federal Reserve will be closely watching how long the disruption to gasoline prices lasts, but it will have less than a month of post-Katrina official economic data by the time of its next policy meeting on September 20 to help assess the economic fallout.
"The Fed might skip (raising rates in) September - but you have to remember that how the world looks today and how it looks on September 20 could be a lot different - a lot worse or a lot better," said Cary Leahey, senior managing director at Decision Economics.
The release of August's employment report on Friday, usually the biggest market-moving economic news each month, passed almost unnoticed as economists and traders pondered the new dilemma for the Fed.
The central bank has been worried about rising inflation pressures and has ratcheted up the federal funds rate at each of its policy meetings since mid-2004. The most recent increase, in August, took the federal funds rate to 3.5 percent.
But Katrina's second wave - soaring gasoline and home-heating prices - are seen by some analysts as posing too great a risk to US consumers' health to ignore.
"There's a 50-50 chance that they pause. I think the economy was already in the process of slowing and the dislocations to the energy sector will be fairly significant. There's reason to be cautious and play it by ear," said J.P. Morgan senior economist Jim Glassman.
The bond market has rallied dramatically all week on growing speculation the Fed would pause, while interest rate futures contracts have reduced the chances of a September hike to 66 percent from close to 100 percent last week.
If the Fed raises rates in September, the futures contracts are pricing in a close-to-zero prospect of a rise at the subsequent policy meeting on November 1.
"The important thing is not whether the Fed can ease but the fact that people can even ask that question and some intelligent people say if the Fed raises rates in September, it would be a public relations disaster," said Leahey.
"And (Fed Chairman) Alan Greenspan does listen. Most economists say the hurricane will not affect Fed policy, but it's not the end of the world if they skip a meeting."
But preliminary results of a Reuters survey of Wall Street economists found most economists reluctant to change their predictions of another rate increase in September, despite this week's dramatic action in the bond market.
"If the Fed pauses late in the year, as we now assume in December, its response will be related to economic fundamentals, with GDP slowing late in the year (in part the result of Katrina and higher energy costs), rather than a direct "emergency" response to events on the Gulf coast," said Peter Kretzmer, senior economist at Bank of America.
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