The Federal Reserve is expected to cut interest rates this week, which would mark the second time this year. However, the Fed’s decision to cut the benchmark interest rate last month is only providing relief on short-term rates. The mid- and long-term rates have actually gone up, not down.
“The market trades the two-year break-even inflation rate — the expectation of what inflation’s going to average over the next two years,” says Arlan Suderman, chief commodities economist with StoneX Group. “In the last six weeks or so, we have seen it jump a full percentage point. That is a significant short-term jump, saying that reinflation fears are coming back in a hurry.”
Suderman points out the Fed can influence mid- and long-term rates, but the agency can’t control them. Concerns about inflation are pushing those rates back up again.
“That could all change over the next couple of weeks, or it could be reinvigorated,” Suderman says. “Longer term, what I’m looking for is a return to the interest rates we saw in the ‘90s and early 2000. But I think there’s going to be a lot of volatility in getting there.”
Real Rates Move Higher
Krista Swanson, lead economist for National Corn Growers Association, says the day before the September FOMC meeting the 10-year Treasury was at 3.63%, but today it’s 4.21%.
“There are a number of reasons the 10-year Treasury is rising,” she says. “Among those, are market expectations for the Fed to slow rate cuts as recent macro data has reduced recession fears. Investor moves are showing growing confidence in the U.S. economy. In other words, the market is driving real interest rates higher, despite the lower federal funds target range. The federal funds rate is the interest rate that banks charge each other to borrow funds overnight.”
Like Suderman, Swanson says the Federal Reserve can influence the interest rates farmers/consumers/businesses pay on loans through changes in the Fed Funds Rate. However, the amount charged by the lender to the customer includes a spread (their profit) and depends on borrower specific factors such as credit score, size of loan, type of loan, loan term, etc.
The Interest Rate Wildcard and Impact on the Ag Economy
When you look at what could impact both livestock and row crop producers the next six months, a major wild card is interest rates. The October Ag Economists’ Monthly Monitor asked economists how much farm interest rates need to fall to find economic stability for farmers, and 46% said 2%.
The Monthly Monitor also asked economists to list topics or stories that could impact agriculture over the next 12 months but aren’t currently getting covered by the media enough. Some economists say it’s interest rates.
“I think one of the things is the return to higher interest rates, which is what we’re seeing play out and how that could negatively impact agriculture at a time when it’s struggling from depressed prices and lingering high input costs,” Suderman says. “As higher interest rates continue that impacts not only your operation costs, your operating note expenses, etc., but it also increases the cost of storing grain, whether you could pay off loans or put that money into interest. All that has an impact on your marketing and marketing strategies.”
Dr. Vince Malanga on U.S. Economy
Dr. Vince Malanga, president of LaSalle Economics, signals future economic stability might be threatened by conflicting survey data, recent steepening of the yield curve and a federal deficit near 7% of GDP.
The real GDP grew at a 2.8% rate during the summer, with inflation at 1.8%, signaling strong corporate profits if sustained, Malanga says. Federal spending and consumption were key drivers, he adds, while trade and construction underperformed. Although business investment was stable, external events such as hurricanes and strikes had an impact.
Malanga also points out long-term rates might be rising due to investor concerns over fiscal sustainability, potentially signaling discontent with growing federal red ink. Housing markets showed signs of a recovery but were negatively impacted by rising rates.
Both presidential candidates have not focused on addressing the deficit, favoring tax cuts and subsidies instead, Malanga adds. The Federal Reserve, which has traditionally stayed clear of fiscal policies, might need to step in, he believes, with Chair Powell likely considering whether to counter deficits or monetize debt.
Malanga’s bottom line: The sustainability of the current growth and low inflation relies on fiscal responsibility and economic adjustments moving forward.
Election Impact on Ag
Ahead of the election, the Ag Economists’ Monthly Monitor asked economists which presidential candidate will be more effective at taming inflation. Fifty-three percent said Donald Trump.
