Facade on the Federal Reserve Building in Washington DC pabradyphoto/iStock/GettyImagesPlus

Financial Outlook - How fast will interest rates rise?

Federal reserve tries to hit the sweet spot.

Interest rates are rising, that much is clear. But how far and how fast the cost of money goes up is a bit more uncertain headed into the next policy meeting at the Federal Reserve.

The market still sees nearly a three in four chance the central bank will raise its base short-term interest rate target by another one-quarter of 1% at the conclusion of the two-day meeting Dec. 19. That would take the so-called prime rate banks charge their best customers to 5.5%, but those odds are lower than a month ago. And chances appear to be fading a bit for three more baby-step hikes in 2019, which seemed likely the last time Fed officials released projections in September. Betting on Federal Funds futures, which provide clues on the market’s bent, see less than a 15% chance of that much tightening.

Of course, any increase in interest rates adds bottom line pressure to farmers borrowing more money in the face of poor profit margins. Interest payments on farm debt are expected to eat up a third of net farm income in 2018 as debt service is 14% of gross sales. Those numbers are about the highest since the farm crisis of the 1980s ended.

Moreover, the reason for expecting a slower pace of interest rate highs may not necessarily be good news. Slower global economic growth and myriad uncertainties cloud the horizon headed into 2019. The growth in world GDP, which hit an eight-year high in 2018, is forecast to slow for the next four years at least. The decline would be mostly due to conditions in advanced areas, like the U.S. and Europe.

Tax cuts gave a boost to growth this year, helping corporate earnings expand the most since 2009. But that fuel is expected to fade next year. Official forecasts don’t yet see a recession in the works, and unemployment is also expected to stay near current ultra-low levels. Inflation is restrained – the latest reading from the consumer price index kept price increases excluding food and energy at 1.9%, below the Fed’s 2% target.

The central bank has a dual mandate by law: Policies that promote stable prices and full employment. Officials have been trying to raise interest rates slowly after years of free money. That keeps inflation in check, and also gives them room to lower rates to stimulate the economy during the next recession.

Of course, economic projections don’t include the type of disruptions that usually crop up to spoil the party. Those fears triggered rising volatility in financial markets, sending stocks to the brink of an official correction. The S&P 500 index broke below its key 200-day moving average, dropping into a correction of more than a 10% loss. Stocks rallied back above the 200-day average briefly, but encountered more selling this week that created a bearish cross between two other benchmarks when the 50-day average broke below the 100-day average.

On-going concerns about the impact of trade disputes are one cause for worry. While China’s tariffs punished U.S. soybean farmers, U.S. sanctions have hurt China worse at a time when its economy was already slowing. Troubles in Europe are open in multiple fronts. Italy is refusing to go along with
EU budget rules that could trigger another crisis, just as Britain’s plan to leave the EU appears to be in chaos as well.

Rising interest rates and safe-haven buying boosted the dollar index to its highest level of the year. And that measure compares to dollar to only a handful of widely traded currencies. The dollar is even stronger compared to emerging market currencies that have been battered by the greenback. That cuts their purchasing power and is normally bearish for grain prices, if not exports. 

Senior Editor Bryce Knorr joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Advisor. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.

For more corn, wheat and soy news, commodity marketing recommendations and daily commodity charts, subscribe to Farm Futures' free e-newsletter, Farm Futures Daily, and keep up during the day with Farm Futures on Twitter.

TAGS: Outlook
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