Bumpy ride predicted when US rates rise

The US economic recovery is sustainable but will become "bumpy" when the Federal Reserve raises interest rates, according to a prominent US economic analyst.

Dr Philippa Malmgren, who advised President George W. Bush on the tax cuts he introduced in 2001, told a Dublin audience yesterday that small business was the key to US economic growth.

Dr Malmgren said this point was often missed by international observers because they tended to focus too heavily on the Fortune 500 firms.

"Two-thirds of net new job creation is driven by firms that employ less than 100 people," she said, pointing to "Joe's pizza place on the corner" as the linchpin that will maintain growth after the Federal Reserve raises rates and borrowing becomes more expensive.

Dr Malmgren was addressing an audience of the American Chamber of Commerce in Ireland. "Small firms have been growing at a significant pace for quite a long time," she said.

Small businesses have, according to Dr Malmgren, used the problems of bigger companies as an opportunity.

This has been as basic, she explained, as occupying cheap, vacant office space or buying up unwanted second-hand office furniture at a low price.

She acknowledged, however, that not all businesses that have flourished by taking risks with the cheap money that has been on offer over the past few years will survive when borrowing becomes more costly.

She said an interest rate hike could lead to a "repeat of the 1990s" by prompting some sort of financial markets crisis.

"Many investments have started to become unglued. Asian equity markets took the first hit. Credit markets and corporate bond markets are probably next," she said. Dr Malmgren said this exposure of "a lot of the rotten stuff" is a clever strategy on the part of US monetary policymakers.