An Urban's Rural View

Corn and soybean prices are underwater but at least growers haven't had high interest rates to contend with. The Federal Reserve has held its benchmark interest rate near zero since late 2008 and farm-loan rates have hovered at historic lows.

But in finance, what comes down must eventually go up. Everyone knows interest rates will rise sooner or later. The only question is when.

The Fed has taken a step toward tighter money by winding down its "quantitative easing" bond purchases, which now look likely to end in October. But interest rates? Most Fed-tealeaf readers have doubted the central bank would boost them before the middle of next year.

Mid-2015 is still the safest bet. But farmers should be aware that pressure on the Fed to move sooner is starting to build. It's still subtle, but it's definitely there.

Fed chair Janet Yellen reiterated in Congressional testimony on July 15 and 16 that the economy is too weak for an earlier rate hike. But the labor market has improved more rapidly than the Fed expected, with the unemployment rate now down to 6.1%. And price increases, while still below the Fed's 2%-a-year target, have jumped closer to it.

Fear is growing that the Fed will move too slowly, courting financial bubbles and inflation. In Wall Street Journal survey of economists, 79% said there's a greater risk the Fed will raise rates too late (http://tiny.cc/…); only 21% said too early. If this mood seeps deeply enough into financial markets, bond buyers could sell, forcing the Fed to move.

The Fed's inflation hawks, while still a minority, have become more vocal. Richard Fisher, president of the Dallas Federal Reserve and a voting member of the committee that sets interest rates for the Fed, now says the central bank will need to raise rates early next year "or potentially sooner" (http://tiny.cc/…).

(Those who attended last December's Ag Summit, put on by DTN/The Progressive Farmer in Chicago, will remember Fisher's superb keynote speech.)

Even Yellen has been forced to hedge her bets. "If the labor market continues to improve more quickly than anticipated by the [Fed]," she told the Senate Banking Committee, "then increases in the federal-funds rate target likely would occur sooner and be more rapid than currently envisioned" (http://tiny.cc/…).

Farm bankers who attended the Kansas City Fed's ag symposium think it's time rates went up. As DTN's Elizabeth Williams reported, the bankers said things like "the crisis is over" and "rates have been low longer than needed" (http://tiny.cc/…). The bankers say their business model assumes a happy medium between savers and borrowers; for too long, they complain, the pendulum swing has favored borrowers.

When I last wrote about interest rates in March, I thought there was a "disconcerting possibility" they could start going up as early as next spring (http://tiny.cc/…). Mine is still not the majority view, and for farmers' sake I hope I'm wrong. But the pendulum is starting to swing in my direction.

Urban Lehner

urbanity@hotmail.com

(ES/)

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