FED Walking a Tight Rope, Raises Interest Rate to 3.75pc

Hurricane Katrina seems out of rate rise path, showing shear confidence of Federal Reserves in economy’s strength to endure the long term affects and high energy cost caused by hurricane Katrina.

In its first meeting on rates since Katrina ravaged much of the Gulf Coast, the Fed raised its benchmark federal funds rate a quarter point to 3.75 percent from 3.50 percent and hinted that more rate increases are likely. The Fed said in a statement that Katrina is ’’a setback in the near term," but doesn’t pose ’’a more persistent threat."

This was 11th straight rise in 16 months which is quite peculiar.

Immediately after the hurricane, energy prices spiked, and there was speculation the Fed might hold off on a rate increase as a way to give the economy a lift. Nevertheless, the Fed boosted rates yesterday.

The current rate rise is evident of the fact that the turmoil caused by hurricane Katrina is not seen as a threat disrupting long term economic activities it is seen as mere as a “road bump”.

Stocks fell yesterday, partly on news of the Fed’s decision. The Dow Jones industrial average declined 76.11 points to close at 10,481.52, and the technology-heavy Nasdaq Composite index dropped 13.93 points, to 2,131.33.

These interest rates hike maneuvers is taken in a bid to tackle inflation, FED uses interest rates to tame the economy during recession it cut down rates boosting economy and during expansion it increases rates in an effort to prevent economy from overheating.

From recent evident steep declines in crude prices after steep rise due to aftermath of hurricane Katrina,Fed does not believe hurricane represent persistent threat.

As of now it comes into light that it takes more than a devastating hurricane to challenge America’s economic might.