Don't Fear Short-Term Rate Hikes

As the economy shifts into high gear, inflationary pressures are reappearing. In the first four months of this year, consumer prices increased at an annual rate of 3 percent, nearly triple last year's 1.1 percent increase.

In an effort to nip inflation in the bud, the Federal Reserve will begin raising short-term interest rates in a series of steps, starting probably at the end of June. The increases are likely to be gradual, however, to give businesses time to adjust and to avoid shocking the economy. The Federal Reserve learned its lesson from the late 1980s, when a series of sharp, rapid increases in interest rates stalled economic growth.

The impact of imminent interest rate increases on the economy is likely to be gradual as well, with economic growth remaining solid, but not so strong as to further increase inflation. This growth promises continued strong profits for businesses, a key factor behind the growth of technology spending.

Moreover, short-term interest rates are at their lowest levels for the past several decades, hovering around 1 percent. Even if these rates were to increase to 2 percent, they still would be very low by historical standards and not likely to pose a major problem for businesses. The same holds true for intermediate and longer-term interest rates.

The Federal Reserve is undertaking a delicate mission in balancing economic growth against inflation, but a sudden spike in the latter could force the Fed to raise interest rates faster than it would like. Absent this scenario, higher rates should not be a problem for the channel.

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