First interest hike in nearly a decade suggests more increases ahead
When you head to the bank for an operating loan this year, it might be more expensive than in years past. Interest rates rose in December, the first time in nearly a decade, at the direction of the Federal Open Market Committee (FOMC), a committee of the Federal Reserve. The committee was set to meet again Jan. 26, just before this issue of Top Producer hit mailboxes.
Higher rates probably won’t affect your ability to borrow. Yet that could change if rates continue to increase throughout 2016 as expected.
Factors that spurred the December rate increase included “considerable improvement” in the labor market, according to a committee statement.
The rate increase illustrates the central bank’s belief the U.S. economy is gaining strength and no longer needs the crutch of near-zero rates, says Matthew Monteiro, vice president of finance and treasurer of Mid-America Farm Credit.
Economy Builds Traction. In a statement, Jefferey Lacker, a committee member from Richmond, Va., said it’s too soon to know if rates will rise in the near term. But he warns they could at any time.
“The public should think of every meeting as a live one, one at which we could decide to raise rates if conditions warrant it,” he stated.
That said, rate increases will be gradual, says Dr. Ed Seifried, chief economist and strategic adviser at BNK Advisory Group.
“It’s going to be very slow, gradual,” Seifried explains. “You can expect this low-rate environment
for some time.”
It’s possible the rate could stay the same for the near term but not probable. Each year, four members of the FOMC rotate out of voting power on the committee. “The voting members of the FOMC will be hawkish,” Seifried says. “New voting members of the committee will push for higher rates.”
How Interest Rates Will Affect Farms
Producers with fixed interest rates shouldn’t expect changes after the December decision to raise rates by the Federal Open Market Committee, says Matthew Monteiro, vice president of finance and treasurer of Mid-America Farm Credit. Yet those with variable rates will feel some impact.
“Short-term borrowing rates, particularly operating lines to purchase inputs, are quickest to respond with increases and remain sensitive to upcoming actions by the Fed,” Monteiro says.
Rate increases aren’t likely to make business more difficult, says Joe Vaclavik, founder and president of Standard Grain. In fact, they could be positive for struggling commodity markets.
“We’re not going back to the 1980s anytime soon,” Vaclavik says. “Hopefully, the increase results in the dollar topping out.”
Although fundamentally a rise in interest rates is seen as giving the dollar strength, that has not always been the case. “Historically, the dollar will break lower after the rate hike,” he says.
Monteiro predicts the dollar will remain strong as the U.S. begins to tighten economic policy with higher rates while other places such as the European Union and Japan loosen theirs.