Interest Rate Takes Second Jump
Last week interest rates took their fourth hike since December 2015, and there is another one expected for later this year. Although interest rates are still low, Matthew Monteiro, vice president of finance and treasurer with Farm Credit Mid-America, says farmers could see short term loan rates increase.
“Interest rates move in anticipation of action the Federal Reserve will take, and short term rates are impacted the most,” says Monteiro. “For dairy, that includes revolving lines of credit for inputs like feed, seed, fertilizer and so forth that would be impacted by short term movement.”
Producers that may be refinancing short term loans will see the initial impact of the rate increase.
It remains to be seen how long term rates will be affected. “The Federal Reserve will be pulling back on their reinvestment of maturing mortgage securities and treasuries as they unwind the Federal Reserve Balance Sheet,” Monteiro says. “That could put upward pressure on long term rates” that could have an impact on capital purchases.
However, the Federal Reserve also announced sluggish growth in the general economy, which Monteiro says could hold down long term interest rates. “Economists expect the current low interest rates to increase to levels more consistent with long run averages,” he says. This is true for both short and long term interest rates.
A rise in interest rates can often mean a rise in the value of the dollar, impacting export opportunities. “Although the federal funds rate and 10-year treasury rates are low in the U.S. compared to historical averages, these rates are higher than for several banks in the developed world,” Monteiro says. “This, plus continued low inflation, creates an environment where we wouldn’t expect weakening of the U.S. dollar.”