This paper isolates critical rural economic development issues and identifies needed federal policy interventions. Despite a long history of federal efforts to improve rural economic conditions, recent policies and programs aimed at stimulating rural development have had little impact. Reasons include: (1) narrowly focused economic development policy that fails to recognize fundamental changes in the rural economy; (2) old and inappropriate business support infrastructure; (3) inadequate human resource base; and (4) dependence on capital sources that are inadequate to meet the changing needs of rural businesses. Federal intervention to increase income and emloyment in rural America is justified on two primary bases: (1) benefits of rural economic development programs are dispersed widely across the nation and are likely to go unfunded without federal partnership; and (2) policy coordination can reduce economic waste resulting from competition between states. Future federal policy should: (1) provide financial support for educational and technical assistance programs that enhance production and entrepreneurial skills, management capacity, and leadership abilities of rural residents; (2) expand both the eligibility for and focus of current programs; (3) support development of appropriate business support infrastructure; and (4) improve rural access to development capital for businesses. Formation and implementation of effective rural development policies requires a committed partnership among federal, state, and local governments. (SV)