No post-Katrina letup in assault on wages

Confounding predictions by many financial analysts and brushing aside pleas from some politicians, the US Federal Reserve Board dismissed the economic impact of the Hurricane Katrina disaster and imposed yet another incremental hike in interest rates.

The Fed raised its short-term interest from 3.5 percent to 3.75 percent, the 11th consecutive increase since June 2004. The hike was passed with a rare dissent by one of the Fed’s 12 voting governors. It marked the first time in more than two years that the body has had a non-unanimous vote.

In an accompanying statement, the Fed acknowledged Hurricane Katrina’s “tragic toll,” declaring, “the widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production and employment will be set back in the near term.”

It quickly added, however, “while these unfortunate developments have increased uncertainty about near-term economic performance, it is the Committee’s view that they do not pose a more persistent threat.”

The so-called “unfortunate developments” dismissed by the Fed as a mere “near-term” problem include an estimated 900,000 people suddenly jobless as a result of the storm’s devastation, more than 350,000 families made homeless and a major American city indefinitely paralyzed.

The Fed’s response to this disaster contrasts sharply with its decision in the face of the September 11, 2001 terrorist attacks on New York City and Washington, when it convened an unscheduled meeting and voted to cut interest rates by half a percentage point, while vowing to take whatever measures were needed to revive the financial markets. Then, the “near-term” threat to the fortunes of Wall Street’s top investors was a matter of urgency.

Similarly, in March 2003, on the eve of the US invasion of Iraq, the Fed cut rates in the face of what it acknowledged could be “short-term” disruptions in energy supplies, leading to higher oil prices in the US. The aim was to cushion the blow to the economy by easing up on monetary policy.

Now, the US central bank has taken the opposite approach, tightening monetary policy under conditions in which it admits that the economy will be set back by Hurricane Katrina, which came in the wake of a 70 percent increase in crude oil prices over the previous year and amid predictions that prices for heating oil and gas could be 50 percent higher this winter than last.

Why the difference in the Fed’s response? Financial analysts and the media have responded to the hike by saying the chief banking institution is more concerned about inflation than the possibility of the economy plunging into recession.

In reality, the principal target of the rate hike is the wages and living standards of the working class. Its purpose is to preclude the possibility of government outlays in the rebuilding of areas devastated by Katrina and the consequent economic stimulus sparking an increase in the real wages of American workers.

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http://wsws.org/articles/2005/sep2005/fed-s22.shtml