Grappling With an Old Enemy

Assessing longer-term market consequences is much harder, however, requiring the synthesis of subtle factors like the impact on both consumer and business confidence. Some observers have noted that the Madrid bombings in March 2003 didn't cause a sustained impact on the world economy. Still, Madrid is not the financial capital that London is.

At the moment, a coordinated monetary response to the terrorism seems unlikely. Fed Chairman Alan Greenspan, Bank of England Governor Mervyn King, and European Central Bank President Jean-Claude Trichet met Thursday and concluded that "markets were functioning" and that there was no immediate need for intervention, Trichet told a news conference.

Central banks, Trichet said, should act as an anchor of confidence. But should the circumstances deteriorate, "you can be sure that we would [act] immediately," he said.

Unless there is another attack, the events of Thursday almost surely will not pressure the Fed into pausing its year-old rate-hike campaign. A bounce back in consumer confidence in June, strong retail sales, strong economic indications recently -- improvement both in manufacturing and the service sector -- and continued home-price appreciation, all argue in favor of the Fed sticking to its current tightening schedule, says John Lonski, senior economist at Moody's.

Strong June chain-store sales overall, and especially from the likes of Target (TGT Quote) and Best Buy(BBY Quote), press the same theme. Likewise, Friday's employment report for June is expected to show a strong rebound.

"If the Fed were due to meet tomorrow, perhaps this event might have caused the [central bank] to seriously think about some temporary delay until the news became clearer," said Bill Dudley, an economist at Goldman Sachs. "Given that they moved last week and won't meet again until Aug. 9, it is unlikely to be a significant factor by then."

Still, a general resurgence of terrorism coupled with high oil could make consumers more cautious and lead to a renewed dip in confidence, according to Bill Dudley, economist at Goldman Sachs.