Hurricane Rita came and went largely without a repeat of the devastation brought by Katrina four weeks ago, setting the stage for another relief rally on Wall Street. While weather reports dictated the direction for stocks last week, the unraveling of the Rita anxiety premium in crude oil prices was the main driver midday Monday.

Crude oil prices were recently down 59 cents at $63.60 per barrel on Nymex, after flirting with $68 last week. That meant good things for the battered shares of airlines and other transportation and related stocks such as

FedEx

(FDX) - Get Report

and

Boeing

(BA) - Get Report

.

The

Dow Jones Industrial Average

was recently up 63.45 points, or 0.61%, to 10,483.04. The

S&P 500

was up 4.95 points, or 0.41%, to 1220.24. The

Nasdaq Composite

was up 11.48 points, or 0.54%, at 2128.32.

Bond prices, which had gained last week on expectations that Rita could hurt growth more than they would spur inflation, also were giving back their gains Monday. The benchmark 10-year Treasury bond was recently down 7/32 in price while its yield, which moves inversely to price, rose to 4.28%.

While 16 refineries remain shut after Rita's passage, the impact is expected to be temporary and overall damage of $6 billion is much less than the $20 billion estimated after Katrina hit the Gulf Coast.

Still, while a

relief rally in stocks is one thing, inflation relief is far from guaranteed.

Federal Reserve

officials were back at work explaining just that message on Monday. The Fed last week delivered its 11th rate hike in a row and signaled more would come, determining that damage from Katrina would most likely be a temporary hit on the economy.

On Monday, Chicago Fed president Michael Moskow, who votes on interest rates, repeated that inflation is "at the high end" of the Fed's "comfort zone," suggesting that the Fed had more room to continue lifting rates.

Fed governor Susan Bies emphasized the "core resilience" of the economy and also warned that the rebuilding required in southeastern states to repair Katrina's damage will "show up in the economic numbers once we get through the initial impact."

That was also the assessment of White House economic adviser Ben Bernanke, one of the top three contenders seen replacing Alan Greenspan as Fed chairman next year. This afternoon, Greenspan himself is also expected to weigh in during a speech at the American Bankers Association.

After falling to a one-week low this morning, gold rebounded in late-morning trade, signaling that inflation jitters remain present. Gold for December delivery was recently up $2.40 at $465.50 per ounce, but still down from last week's 18-year high of $479.

To equities players, the threat of inflation next year appears far removed. According to Morgan Stanley economist Richard Berner, investors have already discounted the post-Katrina "triple-whammy" of rising energy quotes, higher headline inflation and slower growth over the next few months, i.e. retail and cyclical stocks took a beating. But the downside has been cushioned by expectations that the economy and earnings will be resilient, and that fiscal stimulus -- between $100 billion to $200 billion of expected government spending to repair Katrina's damage -- will help next year.

"But investors don't seem to have focused on longer-term risks," such as another energy price surge or rising core inflation, Berner says.

Beyond huge spending on reconstruction, there's another reason to be concerned about inflation: The housing market, although it's shown unmistakable signs of cooling, is still strong enough to provide spending power for consumers via the home-equity cash machine.

On Monday, the National Association of Realtors said that sales of existing homes rose 2% to 7.29 million in August, the second-highest level of sales on record, from 7.15 million the previous month. Wall Street economists were expecting sales to drop to 7.11 million.

Furthermore, the median price of existing homes rose to a record $220,000, marking a 15.8% gain from August last year.

That was enough to boost the Philadelphia housing sector index, which was recently up 1.26%, thanks to sharp gains in the stock of such homebuilding stars as

Toll Brothers

(TOL) - Get Report

,

Lennar

(LEN) - Get Report

and

Ryland Group

(RYL)

.

A lot of economists are now expecting that with housing affordability at 14-year lows, rising interest rates and weakening consumer confidence, the housing market has begun to cool down. Much higher home equities, however, should continue to provide a strong fuel to consumption for a long while.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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