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What Rising Interest Rates Mean for Farmers
The Federal Reserve raised interest rates in June for the second time in 2018. Matt Monteiro, vice president of finance and treasurer for Farm Credit Mid-America, gives these points to keep in mind when thinking about how interest rates may affect farmers.
1. Rates are still historically low.
When the financial crisis hit in 2008, the Federal Reserve Open Market Committee, or the Fed, set the federal funds rate to zero or a quarter percent to influence economic activity and to bring the economy back. The Fed kept it there until December 2015. The recession was prolonged and the recovery was slow. Since then, the Fed has increased rates a few times by a quarter of a percent each time. That impacts the absolute shortest-term rate: the overnight rate.
The Fed took action this June to increase that overnight rate from 1¾% to 2%.
“That is historically still relatively low,” says Monteiro. “As the economy heats up, with new tax laws and low unemployment, the Fed is increasing rates because it doesn't want the economy to overheat and trigger inflation. It is doing it in a measured pace, because if it goes too quickly, that will stifle the economy and we'll go back into recession again.”
2. Long-term rates are less affected.
Short-term type of loans such as revolving lines of credit and operating loans are going to be impacted more.
“Farmers’ day-to-day operational funds, using an open line of credit, are more impacted than their longer-term borrowing,” says Monteiro. “They're seeing the biggest impact on those open lines of credit and their very short-term borrowing."
The 10-year treasury is about 2.9%. There's not much of a difference between the short end and the long end, so there is less of a premium to borrow longer term, he says.
3. Expect more rate hikes this year.
The Fed has already increased rates two times this year and will likely increase it twice more – in September and December, says Monteiro. If twice more, that would be a full percentage point in quarter increments.
4. Current events impact the Fed’s decision.
“Right now, the big story is trade policy between the U.S. and China,” says Monteiro. “Markets react around the world. That impacts the Fed's decision on whether it increases rates and how quickly.
5. There is no need to panic, but call your lender.
Farmers with long-term fixed mortgages are locked in, says Monteiro, but customers who are on adjustable loans getting ready to adjust can see a pretty significant increase.
“It comes down to the terms of their loan. We really encourage borrowers to make sure they understand their loan agreement. If farmers were using short-term money that was very inexpensive two or three years ago, they may look at that differently as the short-term rates increase.”
6. Don’t change plans overnight.
If your business plan calls for expansion, stick with it. “Don’t make decisions based only on interest rates,” says Monteiro. “Interest expense is only one of the costs to operate.”
7. This is not your grandfather’s 1980s Farm Crisis all over again.
In the 1980s, high inflation drove interest rates. That is not the case today. “The long-term outlook for inflation today is about 2%, but you never know what the future will hold,” says Monteiro.
8. Watch the Fed.
“It controls the overnight federal funds rate and it gives a lot of information on those longer-term views,” says Monteiro. “That can really help farmers understand what the economy is doing. The two things the Fed focuses on is maximizing employment and keeping inflation around 2%. We are there with full employment and 2% inflation. It is managing that short-term rate in order to keep those things in balance.”