The Federal Reserve concluded their recent meeting without raising interest rates, but how long will that last? Analysts say interest rates will likely increase a total of three times this year, but could increase four times.
“We have what everyone is calling a ‘Goldilocks economy.’ It's not too cold and it's not too hot, it's just right,” Tanner Ehmke an economist at CoBank told Chip Flory on AgriTalk. “But they're watching what's going on with unemployment and they know that wage inflation could pick up and that could drive inflation higher, so they're maintaining this steady forward path of increasing rates.”
According to Ehmke there’s concern in the market over whether or not the Fed will increase interest rates four times in 2018 or the previously planned three times as promised.
“The reason being is we have very tight unemployment. Unemployment is at 3.9%, which is the lowest since 2000, and the time before that you’ve got to go back to the 1970s. So unemployment is really tight,” he explained. “The problem is we're not seeing the wage inflation nationwide, and the reason that's important is because wage inflation is the main driver of core inflation.”
He explained that’s what has kept the Fed from increasing rates recently, but the committee has not indication they’re going to “back off of their path forward.”
“The reason why they're indicating that ‘hey we understand that inflation is weak but we are still going to march forward on higher rates’ is because after coming off of this decade or so of very, very low rates, they don't want to shock the economy,” he said. “They don't want to deflate any potential asset bubbles out there. Whether you're talking about farmland, or whether you're talking about auto loans, they don't want to shock the system.”
Ehmke said analyst expect another rate increase in June, and another one in September. December is the wild card.
“They've raised rates in December each of the last three years. So there's some argument over there, whether that's going to happen again. It would be four rate increases for the year,” he said. “So that's where a lot of economists are kind of scratching their heads and wondering if the Fed wants to increase the pace of increase or increase the pace of rate hikes.”
How Will Rate Increases Impact Farmers?
While the interest expense increase is minimal, $250 in most cases, they are adding to pile of expenses farmers are already learning to cope with.
“If you back up a little bit and look at what's going on, you know how high these rates are going. The fed is raising rates 25 basis points or point .25%. So if you do the math on that. Let's say you have an operating loan of 100,000 bucks and so you're the cost of your loan goes up by 25 basis points. What does that cost the farmer, it's $250 bucks. That's not going to break the bank for most people,” he said.
Still over the long haul, Ehmke said steady rate increases are just one more brick on the pile of the load that farmers have to carry in a rising cost environment.