to be alert to inflationary pressures and would respond to changes in economic prospects as required to fulfill its obligation to maintain price stability. an additional benefit of the solid economic performance of the u. s. economy was that federal tax revenues were coming in faster than expected, an indication that the budget deficit for the fiscal year would be at its lowest level in the past three years. however, despite the near - term positive fiscal news, no progress had been evidenced on addressing the longer - term fiscal issues involving the significant projected rise in spending for federal health and retirement programs. in any event, i had expected that i would be going into the september fomc meeting, and then speaking to you, with the u. s. economy on an upward trajectory. but that expectation changed dramatically when hurricanes katrina and rita came along. although the combined effect of the hurricanes was contained within a geographic area that accounted for just under 2 percent of the nation's population and roughly the same amount of the nation's production and income, the potential for spillover effects on the economy more broadly was difficult to assess. the disruptive effect on oil refining, natural gas distribution, and chemical production ; the damage to major ports and transportation infrastructure ; and the significant devastation of a major city raised the risks of an effect on the economy that exceeded the direct effects on the areas battered by the storms. to be sure, these disruptions also had adverse implications for costs and prices. further clouding the picture, the fiscal policy implications of funding the rebuilding and restoration had not yet been fully defined. as our september fomc meeting followed hurricane katrina by approximately three weeks and was held concurrently with the formation of hurricane rita, i felt that there was insufficient information as well as great uncertainty about how these forces would play out in the near term. as a result, i voted to pause in the removal of policy accommodation until more was known. what was clear then, and has become even more evident in the time since, is that the gulf coast of the united sates suffered extraordinary human and economic losses. the news reports have graphically displayed the tragic dislocations of millions of people, loss of life, and destruction of 1 / 4 property. as well, we have seen moving examples of the efforts directed toward the rescue of and care for the victims of the storms. more recently, the massive cleanup operations have gained momentum, and it has been awesome to witness the determination of people beginning to rebuild their lives. these forces

- - the destruction wrought by the hurricane and the reconstruction efforts - - will be two of the key factors shaping economic activity in coming months. a frustrating aspect of the situation is that even now, some six weeks after the first of the hurricanes made landfall, the incoming data are only beginning to shed some light on the economic ramifications of the storms. clearly, however, the destructive power of these hurricanes reduced economic activity by forcing the evacuation of millions of people from their places of work, destroying factories and offices, shuttering businesses, and closing schools and government offices. the overall magnitude of many of these effects will be difficult for economic statisticians to measure. in the industrial sector, however, a number of real - time indicators are available, and they show the effect in that sector to have been significant. the federal reserve estimates that hurricane katrina reduced industrial production by 0. 3 percent in august, even though it struck near the end of the month. oil and gas production and refining were particularly hard hit. hurricane rita further damaged the gulf coast infrastructure and set back the pace of recovery. in normal times, the gulf produces 1 - 1 / 2 million barrels of crude oil per day - - about 30 percent of the national total - - and 10 billion cubic feet of natural gas per day - - about 20 percent of the national total. after hurricane rita struck, 100 percent of the oil production in the gulf region was shut in for a time, as was 80 percent of the natural gas production. petroleum refining, chemical plants, and electricity distribution were also relatively hard hit by the hurricanes. all told, industrial production was held down significantly in september as a result of lower output in these sectors. that said, various daily and weekly data sources indicate that the industrial sector is beginning to recover in october as oil and gas production come back on line and repairs to factories and distribution advance. the resilience and resourcefulness of the u. s. economy is illustrated by the reactions of firms and industries to the disruptions. for example, the reduction in refining capacity in the gulf has been partly replaced by higher operating rates in other areas, shifts in the composition of refined products, and an increased reliance on imports. as a result, stock - outs and supply disruptions in the energy sector have not been widespread, at least thus far. industry sources suggest that much of the repair and recovery effort will likely be undertaken over the course of the next several months, and as that occurs, production rates should