Fed's hike won't stall recovery.

• Author: Schwab, Robert
• Position: On Colorado - Column

"WHAT'S THE MATTER WITH A little inflation?" the businessman asked me. It's the same question I had when I was paying a 10 percent interest rate on a mortgage on a house in Texas more than 15 years ago, after the overbuilt real-estate economy there burst and home values were dropping in tandem with the liquid assets of savings-and-loan associations. While home values were going up, the rate on the loan didn't seem so bad to me.

As Colorado's economic recovery still struggles to gain momentum this summer, and as the Federal Reserve Board raised a key interest rate a fraction at the end of June to guard against inflation, you have to forgive someone from Colorado's business community for wanting a little more heat locally before the nation's economy is made to cool.

Local economists were quick to point out three years ago that Colorado is more than ever before dependent on the national economy, and that growth elsewhere is usually going to precede much growth here. We're still waiting.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, visited the Denver branch of the bank in early June and suggested businesses within the bank's region, which includes Colorado, had grown more optimistic.

But Hoenig, who is currently a voting member of the Open Market Committee of the Fed, which decides on raising or lowering interest rates, was here that day to deliver a message. He said, as Fed Chairman Alan Greenspan had said the day before, that the Fed would not be afraid to raise rates to cool the economy but it would do so at a "measured" pace.

In using such terms, Hoenig makes a bow to the slowly recovering businesses in Colorado, and yet signals that the Fed is watching over mega-forces that affect the U.S. businessman, like oil prices, continued war in Iraq and growing U.S. federal deficits, commodity prices for raw materials besides oil, which are being boosted by economic growth in China, and the value of the dollar.

The Fed, after all, must look to the general good, and dance a fine line.

That's why the interest-rate increase was only a quarter of a point; that's also why Hoenig and Greenspan were out telegraphing the Fed's intentions a month ahead of the actual vote on the rate increase; and that's why Fed governors still insisted...