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MAY 17, 2000

A Friend at the Fed

Edward Boehne has looked out for small business. Now, he's leaving


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Parting Words from Edward Boehne

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Entrepreneurs may not have known it, but for the past two decades they have had an ally at the Federal Reserve: Edward G. Boehne. The president of the Federal Reserve Bank of Philadelphia, Boehne has long had an interest in small companies, meeting regularly with the Entrepreneurs' Forum of Greater Philadelphia and serving on the board of the University City Science Center, the nation's oldest business incubator. Perhaps most helpful, he has acted as a dove in Fed policy meetings, urging lower interest rates or modest increases in opposition to anti-inflation hawks. Alas, small business loses its friend at the Fed this month, when Boehne, 60, retires. He recently spoke with reporter Karen Cheney. Some excerpts:

Q: What got you interested in entrepreneurs?
A: I became enamored of the vibrancy I see in the smaller businesses, especially the ones caught up in new technology. So much of the growth in the American economy comes from this group. And this feeds directly into Federal Reserve policy.

Q: To what extent does the Fed consider the effect that monetary policy has on small businesses?
A: The ultimate job of the Federal Reserve is to help keep the economy on a sustainable path of prosperity. When rates go up, it's going to put a squeeze on small business. We know that. It is not done lightly. But we must consider the long-term good of the economy. It's like going to the dentist. It's a short-term sacrifice for longer-term good. If it is best for the long term to raise rates, then that is helpful for small business, too.

Q: But as rates climb, they have a much more severe impact on small companies. Isn't that unfair?
A: We know that interest-rate decisions have different impacts across the economy. I wish we could have an economic policy that affects everyone equally. But larger businesses have more alternatives. They can get better rates and work out more arrangements with suppliers. But we can't let the whole economy go into boom-bust cycles because of the impact raising rates will have on small businesses.

Q: Are there any aspects of the New Economy that you find particularly troubling?
A: One development that has occurred, especially with the run-up in equity values, is that a number of people are just in it to make an initial financial killing. That is not helpful to small business. The notion that it really doesn't matter whether there are earnings hurts the general entrepreneurial effort. It undermines the credibility of entrepreneurship.

Q: How does the recent drop in tech stocks change that?
A: Smaller companies will have to think through what they are trying to sell to investors. Investors will be more selective and will want to get more into the fundamentals. The solid small company with solid ideas that are marketable will find a receptive investment climate. But those operating mostly on fumes will have a harder time.

Q: Will the steep decline in dot-coms have a sobering effect on the rush to go public?
A: It will have some effect. But I think the basic instinct is still there to go public. Maybe this will inject more realism into thinking. But the motivation is still very strong on the part of a lot of people. It's worked so often for other companies that it has a contagious effect.

Q: Now that some of the steam has been taken out of Nasdaq, is there less pressure to raise rates?
A: The Fed focuses on the overall economy, and equity prices are but one of a number of factors. We have seen some preliminary warning signs that the risk of inflation is becoming more of an actual uptick. Whether it is the beginning of a trend remains to be seen. Overall, I believe there is too much demand pressing on supply. That is why the Federal Reserve has been moving toward moving rates up gradually. And we will have to continue doing that until we feel the economy is in balance.


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