3 Tips for Managing Interest Rate Risk
“Nobody has a crystal ball for predicting exactly when the Fed will start raising rates,” says Matthew Monteiro, Vice President Finance and Treasurer for Farm Credit Mid-America. Even though the signs of an imminent rate raise have been accumulating for nearly two years, events such as a bust in oil prices, China’s recent currency devaluation announcement, or a slowdown in job growth could delay a rate rise. Nevertheless, with rates at historic lows, Monteiro says now may be the time to lock in a loan rate. Here are three points he says farmers should consider.
1.) Look At History
Rates haven’t been this low since the 1950s, when rates began a steady march upward. During the stagflation era of the 1970s and early 1980s, rates rose. Soon thereafter inflation cooled and rates started trending down, and have continued to do so for more than 30 years. There have been upward bumps on the chart along the way, with the Fed adjusting every few years in response to economic events, but the long-term trend has been down. The short end of the yield curve has fallen significantly since 2007, when they were above 5%, to near zero today. Considering the long term trend of interest rates and the unsustainability of the historic lows since the 2008 economic crisis, we may be on the verge of an increase in rates.
2.) Listen to the Fed
At recent speaking engagement in Cleveland, Fed Chair Janet Yellen pointed to an improving economy and moderate inflation. In her July 10 outlook for the economy statement, Yellen said that she “…expects that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy.1”
3.) Lock in a low rate
Because rates won't be this low forever, many Farm Credit customers have already taken advantage of our loan conversion program. A conversion fee of $350 lets you lock in today’s low rates on any-size loan. If you haven’t converted yet, you can still do so even after rates start to rise, but improved employment figures and Fed statements are indicating that the window of opportunity for locking in the lowest rate is shrinking for refinancing existing loans or taking out new loans.
Farm Credit is committed to being a reliable source of capital for customers in any economy. We advise to always make borrowing and buying decisions based on opportunities and business need.
Read more here and download the Farm Credit Mid-America Insights report.