Sept. 6 (Bloomberg) -- For the first time in nearly a year and a half, the outcome of the next Federal Reserve policy-making session, two weeks from today, isn't a foregone conclusion.

The devastation caused by Hurricane Katrina, the displacement of hundreds of thousands of people and surging energy prices are going to slow economic growth. The issue for Fed officials is by how much and for how long.

The odds at this point probably slightly favor another quarter-percentage point increase in the target for the overnight lending rate, which would raise it to 3.75 percent.

One reason for that assessment is the rapid restoration of power in the area and progress in re-establishing interrupted oil and natural gas production and the flow of refined products through pipelines.

The Department of Energy said yesterday that about 1 million customers remained without power, down from 2.7 million early last week. Even within New Orleans itself, power had been restored to several hospitals and the airport, and to all but three of the 11 refineries in the area.

In addition, the main unloading point for tanker shipments of crude oil has been operating at 75 percent capacity for several days and crude is available to the refineries, the department said. And officials at Colonial Pipeline, which serves the East Coast, anticipated operating at 100 percent of capacity by last night, the department said.

Before Katrina

Before the hurricane struck, the Federal Open Market Committee was clearly on track to move the overnight rate up to 3.75 percent, based on the statement issued after the last committee meeting on Aug. 9 and the minutes released three weeks later.

``Although uncertainties about the underlying pace of productivity increases, trends in labor force participation and the level of potential output complicated the inflation outlook, higher energy prices and reduced resource slack were seen as pointing to elevated inflation pressures,'' the minutes said.

Even after the overnight rate target was raised to 3.5 percent at that meeting, it ``would remain below the level that members anticipated would prove necessary to contain inflation pressures and keep output near potential, and thus in all likelihood further policy action would be required,'' the minutes said.

Santomero and Rates

One committee member, Anthony M. Santomero, president of the Philadelphia Federal Reserve Bank, said in a speech on Aug. 31, two days after the hurricane struck, that he hasn't changed his mind on whether further policy action is needed.

Santomero said that, the hurricane notwithstanding, ``I believe the U.S. economy remains on a path of sustained expansion, and I expect real GDP to grow at a rate of 3.5 percent to 4 percent in 2005.''

``Rising energy prices, the infrastructure disruption experienced in the Gulf of Mexico and price adjustments in the housing market could affect the pace of growth. Given this scenario, we at the Federal Reserve will do our part to help sustain the growth by pursuing a monetary policy that preserves price stability for the long term,'' he said.

In other words, Santomero at least appears to want to keep raising rates.

Without minimizing either the extent of the physical damage or the human suffering the hurricane caused, it is fair to say that some of the usual forces that offset the economic impact of natural disasters are already at work.

Impact on Growth

Hundreds of millions of dollars have already been spent in connection with the relief effort. Buses chartered, bottled water shipped, satellite telephones bought, repairs to downed power lines, off-shore oil and gas rigs and even businesses in New Orleans' French Quarter -- it all adds up very quickly.

Macroeconomic Advisers in St. Louis told its clients yesterday that the group of economists on its Consensus Panel concluded that the hurricane would reduce economic growth by about a half-percentage point in the current quarter and a little more than that in the fourth quarter.

Before last week, Macroeconomic Advisers was forecasting GDP growth at about 4 percent for this quarter and 3 percent to 3.5 percent in the final three months of the year.

Economic Hit `Overblown'

``While there is much to be concerned about, already by week's end there are signs that the greatest fears about the severity of the hit to the domestic energy sector were probably overblown,'' Macroeconomic Advisers said. ``Prices for energy products, while still higher than immediately before Katrina, have nevertheless declined sharply in the last day or two. The wholesale price of gasoline (on the NYMEX; October contract) closed Friday at $2.18/gallon, down almost 23 cents from Thursday and considerably below the peak price of near $3/gallon.''

Macroeconomic Advisers had also been predicting that the Fed would raise rates at each of its three remaining policy making sessions this year. As of now, they said they are withholding judgment about what will happen at the upcoming meeting.

L. Douglas Lee of Economics from Washington reached a different conclusion.

``The Fed will use the time between now and the September 20 FOMC meeting to collect as much information as possible,'' Lee told his clients. ``At present, it is unlikely they will change interest rates at this meeting.

``To increase rates would require a great deal of confidence that circumstances were rapidly returning to normal and we do not expect this level of confidence to exist. Rate increases are likely to resume at some point, but the timing is unclear,'' Lee said.

Pondering the Consumer

As time passes, the flow of federal money for personal assistance and rebuilding, including billions of dollars for highways and other public infrastructure, will escalate. Fed officials will have that in mind, as well as the loss of income from jobs that have disappeared and businesses that have been wiped out.

And of course they will be pondering how consumers will respond over time to higher gasoline and home heating oil prices. Will consumers cut back on other spending so they can afford to buy the gas they want? Or might they actually be encouraged if prices were to drop back under $2 a gallon after a period in which $3 or $3.50 had briefly become the norm?

It's probably going to be the most interesting meeting for the policy makers in a long time.

To contact the writer of this column: John M. Berry in Washington at jberry5@bloomberg.net .