stability. financial conditions of businesses business expansion solidified last year and continued growth by businesses will depend in part on their financial conditions. so let me take a few minutes to review the financial position of the business sector, and especially the dramatic improvement from a few years ago. since 2001, firms have improved their balance sheet liquidity, reduced leverage, and restructured their liabilities, responding in part to investors ’ concerns arising from some high - profile unanticipated meltdowns in the early part of this decade. in addition, firms have significantly cut costs through dramatic gains in productivity, which has boosted profits. in my view, even with a rise in interest rates and some moderation in profit growth, the business sector should remain financially strong and continue to expand. the improvement in corporate balance sheets in the past few years has been substantial. most noteworthy are the gains achieved in balance sheet liquidity. firms have taken advantage of low longterm interest rates to pay down short - term debt with longer - maturity debt. at the same time, firms have built up their cash positions to extraordinary levels. at the end of last year, the ratio of cash and equivalents to short - term debt at nonfinancial corporations stood at about twice its average level since the 1950s. in addition, many firms have taken advantage of low long - term interest rates to refinance high - cost debt, and others have used profits from operations or asset sales to retire debt. as a result, interest expense burdens have declined on balance and nonfinancial corporate debt has grown only modestly in recent years, its slowest pace since the early 1990s. these repairs to balance sheets have also reduced the exposure of many firms to rising interest rates, especially in the near term. in particular, the replacement of short - term debt by long - term bonds means that less debt will have to be rolled over in the near term at higher rates. in addition, because much of the long - term debt has a fixed rate, interest payments typically are unaffected over the life of the bond. moreover, research by the board staff suggests that firms that rely more on floating - rate debt, and for that reason might be more vulnerable to rising rates, have in recent years tended to use derivatives to hedge some of their exposure to interest rate risk. thus, for many firms, the effect of rising interest rates will be mitigated and spread out over time. also, as we learned from the episode of

susan schmidt bies : the economy and managing personal finances remarks by ms susan schmidt bies, member of the board of governors of the us federal reserve system, at the canisius college richard j wehle school of business community business luncheon, buffalo, new york, 18 april 2005. * * * i am very pleased to join you. today i want to begin with a brief assessment of the economic outlook before discussing financial conditions of businesses and households in more detail. then, i will turn to some issues related to the management of personal credit and savings and the greater need that consumers have to improve their understanding of financial services and providers as the financial marketplace has expanded. i also need to add that i am expressing my own opinions, which are not necessarily those of my colleagues on the board of governors or on the federal open market committee. the economic outlook as you know, the economy has been expanding at a solid pace lately. real gross domestic product grew at an annual rate of 3 - 3 / 4 percent in the fourth quarter and growth in the first quarter looks to have remained solid. labor markets have continued to improve, albeit at a slow pace, with private nonfarm payroll employment posting moderate gains in 2004 and in the first three months of this year. business outlays for capital equipment grew robustly in the past two quarters. consumer spending also has continued to expand, although higher energy prices may be crimping household purchases recently. consumer and business confidence remain favorable, despite a slight dip in consumer sentiment in early april, and, with accommodative financial conditions, i expect that the economy will continue to expand at a solid pace this year. on the inflation front, broad measures of consumer inflation have risen somewhat faster than they did in the year - earlier period, boosted by higher energy prices. focusing on the core price index, which excludes food and energy, it too has been a bit higher than it was the year before, likely reflecting the indirect effects of rising energy prices and the falling dollar. productivity is slowing from its exceptional pace of the past couple years and unit labor costs are again increasing. though inflation pressures have risen somewhat in recent months, longer - term inflation expectations appear to have remained well contained. i believe that, while underlying inflation is expected to continue to be low, the federal reserve must be more alert to monitoring incoming data, and continue to remove policy accommodation at a measured pace, consistent with the incoming data and its commitment to maintain price