Katrina is fading in the bond market's rear-view mirror.

Katrina is fading in the bond market's rear-view mirror. Rates are back where they were two weeks ago, the 10-year T-note above 4.1 percent, mortgages 5.75 percent, save a residual bid in the 2-year T-note, placed by the few still hoping that Katrina will force the Fed to back off.
Give that up. Expect the Fed to proceed with another .25 percent on Sept. 20, Fed funds to 3.75 percent, and another Nov. 1 and Dec. 13, and continuing until the economy slows, housing first.
How can Katrina have had so little impact? Why no 9/11 follow-through?
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9/11 itself, as a financial matter, lasted barely 90 days. The follow-on Fed easing and near-hit deflation were stock-bubble artifacts. The main economic impact of 9/11 was the total shutdown of Wall Street for 10 days, whereas the Gulf Coast is one of the weakest economies in the nation, on a par with Appalachia except for energy infrastructure. Were it not for energy (now either back on line or replaced by collateral circulation), Katrina would have had no measurable economic impact at all.
Yes, there are some 400,000 unemployed. Yes, the spike in retail energy costs has a slowing effect on the economy. But both are more than offset – way more, sez here – by the counter-flood of money spent and to be spent on rescue, relocation and reconstruction. If you count up all the R3 people at work around the country, it may be a bigger number than the unemployed; at least, better paid.
Insured losses may be in the $50 billion range, but cause no economic drag at all. Properly reserved losses cause no harm to insurance companies, just a post-storm surge of cash into the economy, paying claims. Congress has appropriated $62 billion so far, in one week, having no idea what for, but appropriated nevertheless. If you want something done fast, don't call FEMA; nothing in government or physics moves faster than Congress when asked to give money away.
From the Fed's perspective, the inflation consequences of the energy-price spike are more harmful than any beneficial slowing of the economy. Energy prices have calmed in the last week, but it looks as though we're going to have three-buck gas for quite a while, and sky-high heating bills this winter.