Federal Interest Rates Rise as U.S. Economy Strengthens



Last week, the Federal Open Market Committee of the U.S. Federal Reserve increased the federal funds rate.

Last week, the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve increased the federal funds rate to a range of 1.25 – 1.50 percent. The move was widely anticipated and had little immediate effect on the stock markets, as it was seen as a sign of a strengthening U.S. economy. Despite three rate increases in 2017, the S&P 500 is up 20 percent year to date.

Interest rates since 2008
After the 2008 financial crisis, the FOMC reduced the federal funds rate to near zero and has maintained it throughout the prolonged recovery. In December 2015, the rate was increased by 25 basis points, followed by a second increase of the same amount in 2016. In 2017, there were two additional 25 basis point increases prior to the December meeting.

“Long-term rates are driven by factors like expectations for growth and inflation.”

Effect on long-term rates
Using the 10-year U.S. Treasury as a benchmark, which is today around 2.4 percent, long-term rates haven't increased like short-term rates, which causes a flattening of the yield curve. Long-term rates are driven by factors like expectations for growth and inflation rather than being managed as part of the Federal Reserve’s monetary policy. A flatter yield curve means long-term rates aren’t much higher than short-term rates, which is a good thing if you are, or are about to become, a long-term fixed-rate borrower. 

Going forward
Included with this month’s statement, the U.S. Federal Reserve released an economic analysis showing an increase in estimated GDP from 2.1 percent to 2.5 percent in 2018.

It also shared the results of a survey of the members’ federal funds rate expectations, which is particularly interesting because the survey targets policy decision-makers. In summary, it estimated three rate increases of 25 basis points each in 2018 and two additional moves of the same amount in 2019. If this plan comes to fruition, short-term interest rates would sit slightly below the 2.8 percent rate threshold by the end of 2019, which is estimated to be the rate which would be expected in the U.S. with full employment and moderate growth. This means that “accommodative” monetary policy is expected to continue for another two years.

Recommendations for farmers
With the flattening yield curve causing long-term rates to have less of a premium over short-term rates than typical, long-term fixed-rate funding could be very beneficial when appropriate. Also, farmers should lock in low rates if not locked in already.

As a cooperative owned by our customers, Farm Credit Mid-America offers very competitive rates, and now patronage too. There was a lot of excitement this past March when we made our first patronage payments. In March, 2018 we look forward to distributing patronage of $88 million to ag customers, which is especially valuable in the current agricultural economy.

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