Fed Intent on More Rate Increases

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July 21, 2005--Federal Reserve Chairman Alan Greenspan appeared before a Senate subcommittee Thursday, repeating his intention to continue raising interest rates, which could hurt small businesses, especially in consumer sectors.

Citing an outlook of "sustained economic growth and continued inflation pressures," Greenspan said the Fed would continue its measured increases in the target rate for overnight bank loans. The central bank has raised interest rates a quarter of a percentage point nine times since June 2004.

The Fed's upbeat outlook was reflected in the Conference Board's announcement Thursday that its leading indicators index increased by 0.9% in June. The increase in the index, which is seen as a gauge of future economic health, was the sharpest since December 2003 and was driven in part by high consumer expectations and strong vendor performance. The groups other indexes, which measure past and current economic activity, increased by 0.3% and 0.2% respectively.

Greenspan said that business investment in equipment and software "seems to be on a solid upward trajectory," which is good for IT firms and other companies that sell to large corporations, according to Bill Rossi, a Professor of Entrepreneurship at the University of Florida. But he added that businesses dependent on consumer spending will almost certainly feel the pinch of any future Fed increases because credit card rates will edge up.

The more serious concern for business owners, according to Ross, should be what Greenspan has called "froth" in the housing market. Long-term mortgage rates have decreased over the past year despite the Fed's efforts to tighten the money supply, which has caused some consumers to take on large amounts of debt in the form of interest-only and adjustable rate mortgages. "When mortgage rates begin to rise -- and they will -- a lot of people are going to be hurting," he said.

Also on Thursday, the Department of Labor announced that first-time state unemployment insurance claims dropped 34,000 to 303,000 last week. The less-volatile four-week moving average fell a more modest 3,250 with 318,000 people filing new claims.

Max Chafkin

Senior writer Max Chafkin has profiled companies such as Yelp, Zappos, Twitter, Threadless, and Tesla for the magazine. He lives in Brooklyn, New York.