As the media and the public's attention has been riveted on oil and gas prices, what has been overlooked to date is the critical value of the ports of New Orleans to the import/export trade of the US. The New Orleans area is home to the largest commercial shipping port facilities in the United States and the fifth largest port complex in the world.

Early reports suggest the damage to the port infrastructure is less severe than the devastation wreaked on the city of New Orleans itself. The degree of the longer-term economic impact will be determined by how quickly the damaged infrastructure can be repaired, the waterways made navigable, and the displaced port workers rehoused and returned to work.

However, even in a best-case scenario, the costs to producers and shippers of commodities and foodstuffs are going to rise as trucking and other more costly forms of transportation replace the barge transportation down the Mississippi. And these increasing transportation costs for food and other basics will apply added pressure to rising fuel and other commodity prices.

Following 9/11, the Federal Reserve instantly responded to the short-term liquidity crisis in the banking system and the psychological threat to the nation's psyche by aggressively lowering interest rates. These actions reassured a traumatized public and provided banks with the solvency they needed. The Fed could take this dramatic action at that time because the nation was already experiencing slackening demand due to the onset of the recession, low ongoing inflation, and a declining Federal budget deficit. As a result, the incipient recession was one of the shallowest on record.

Today's economic backdrop - strong consumer demand, rising oil prices and a rising Federal budget deficit all contributing to an undercurrent of inflationary pressures - could not be more dissimilar. In the aftermath of Katrina, the Federal Reserve will be caught in a bind. Lowering rates in this environment, as they did after 9/11, to ward off recession would certainly add fuel to an inflation fire that is smoldering. Continuing to raise rates to ward off potential inflation, as they have been, increases the risks of recession.

Our best guess today is that the Fed will not reverse course and will at best pause or even continue to tighten short-term interest rates in the face of any signs of inflation. Thus, in this view, Hurricane Katrina has just significantly increased the risks of recession for the United States and perhaps globally.

Much will depend on the appraisal of the degree of damage to the port infrastructure and the waterways and to how quickly the workers displaced by the storm can be rehoused. The inevitable short-term spike in oil and gas prices, while this is what will grab the headlines, will not be the most significant economic issue. The ability of the port traffic to resume something approximating normalcy will be the far more critical variable.

In the meantime, a huge proportion of the residents of the Gulf region have lost homes, communities, and their means of livelihood. Many have lost their lives. Getting the population and the region back on its feet is going to be a major national challenge.

To contribute to the victims of Hurricane Katrina, see my earlier post for a list of aid agencies.