Lower interest rates ahead? Not so fast
With the Fed and the market holding differing views, expect volatility and uncertainty in the coming months
After 11 increases since March 2022, it appears the Federal Reserve has stopped raising interest rates, at least for now.
On. Dec. 1, Federal Reserve Chairman Jerome Powell said inflation had declined to a “highly welcome” 3% over the 12 months ending in October. The Fed’s goal of bringing down inflation, of course, was the driver behind raising interest rates. And, recently, intermediate and long-term rates have fallen slightly. These developments might normally suggest the Fed would be open to lowering interest rates. But there are a few caveats to keep in mind.
• Heading down or holding? For starters, Powell said it was “premature” to conclude “with confidence” that the Fed has achieved a sufficiently restrictive stance on inflation or to speculate when policy might ease. Although the market and many analysts are calling for rate cuts in the first half of 2024, the Fed has indicated it may be late 2024 before it announces rate cuts, if any. “We are prepared to tighten policy further if it becomes appropriate to do so,” Powell said.
• Volatility and uncertainty for ag markets. If interest rates do begin to fall, that should relieve price pressure on a wide range of commodities, according to my colleague Eric Osterhaus, a principal with Pinion Global.
“The result back to the producer, however, is cloudy,” added Osterhaus, who specializes in grain and livestock marketing and risk management strategies. “An easing of inflationary pressure could produce a corresponding decrease in commodity prices. As we transition to a lower interest-rate environment, the impact on markets will only increase volatility and uncertainty.”
The best way for producers to plan for this uncertainty, Osterhaus said, “is to sharpen their pencils and have a firm grasp on production costs and cash-flow requirements for the upcoming year. Producers need to be willing to utilize all the risk management tools at their disposal to take action if and when profitable prices appear.”
• Recession ahead? The Fed’s primary purpose in raising rates was to slow down inflation to 2%. But if Fed officials don’t ease rates appropriately, many see a risk of a hard landing or recession.
A rate decrease by itself doesn’t mean we’re entering a recession, but some see it as a bearish sign that the Fed is trying to increase economic activity. Fed officials have set rates at 5.25% now, so they at least have a cushion to combat a recession with rate cuts. The other program to watch is the Federal Reserve bond-buying program as it continues to devise their exit plan from propping up the bond market.
• Land values and cash deals. Lower interest rates typically will increase land values. But the last 18 months of increased rates didn’t have as big an impact on ag real estate as other types of real estate.
One trend some of my Pinion colleague have seen, though, is that more cash deals have been pushing ag real-estate prices higher. Some deals have been combinations of cash on hand, or buyers already had low rates locked in and are using the collateral of existing assets and loans to complete deals.
• Effect of the 2024 presidential election. With 2024 an election year, the pressure is on President Joe Biden to avoid a recession.
Typically, incumbent presidents win re-election except during recessions, so Biden will have incentive to find other ways to keep the economy moving forward. He can’t directly impact interest rates, but any significant spending bills to spur the economy would increase inflation again, leading to the potential of more rate hikes.
That assumes the spending bills could get by the Republican-controlled House, which seems unlikely. So, we may see more executive orders issued in the second quarter and third quarter that achieve the same result.
• Advice for farmers and ranchers. A decline in interest rates would be good news for anyone with operating loans, equipment purchases, credit cards and mortgages. Since interest-rate cuts aren’t a given, however, keep your eyes on the matters you can control. Stay aware of the financial climate. Know your numbers. Keep accurate, organized financial records. Continue to look for ways to streamline your operations. Reach out to your lender, CPA and risk management advisor to make sure you’re doing what’s best for your operation. These solid steps will help you make sound decisions for what could be a turbulent new year.
Editor’s note: Maxson Irsik, a certified public accountant, advises owners of professionally managed agribusinesses and family-owned ranches on ways to achieve their goals. Whether an owner’s goal is to expand and grow the business, discover and leverage core competencies, or protect the current owners’ legacy through careful structuring and estate planning, Max applies his experience working on and running his own family’s farm to find innovative ways to make it a reality. Contact him at [email protected].
