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Wanted: A Steady Fed

The new Chairman of the Federal Reserve, Ben Bernanke, has a lot to consider when deciding whether to change interest rates. But here's something entrepreneurs might want him to note: They don't much like surprises.

In the past, unexpected moves by the Fed have swiftly altered entrepreneurs' opinions about the economy. That led to changes in small business hiring, inventories, and investment, according to economists William Dunkelberg of the National Federation of Independent Businesses (NFIB) and Jonathan Scott at the Fox School of Business at Temple University.

The Fed typically determines the direction of interest rates at its eight policy meetings during the year. But three times since 1994 -- in April, 1994, and April, 2001, as well as in September, 2001 -- it changed rates between meetings. To see if those unexpected rate changes affected small businesses, Dunkelberg and Scott examined the results of the NFIB's monthly survey of entrepreneurs' expectations before and after the Fed's surprise moves. They compared answers to 11 questions, ranging from entrepreneurs' opinions of the economy at large to their plans for hiring.

Dunkelberg and Scott found statistically significant changes in responses to 7 of the 11 questions after the 1994 rate change. In 2001 there were significant differences in replies to nine questions after the April rate move and seven in September. "If we see the numbers are changing, we know it's making a difference in the macro economy," says Dunkelberg.

Interestingly, whether the interest rate was raised or cut didn't matter. For example, after the Fed cut rates in April, 2001, entrepreneurs had a more pessimistic outlook. When it comes to the Fed, it isn't what the chairman says -- it's how he says it.

By James Mehring

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