September 13, 2016

Will Interest Rates Rise?

 |  By: Anna-Lisa Laca

Many producers are more leveraged today than they have been in years. One piece of anecdotal evidence: More than 5,000 farmers are on the waiting list for an operating loan through USDA’s Farm Service Agency.

Still, America’s economy as a whole is improving, which leads some to think an interest-rate hike is on the horizon.  

“Personally, I think the economy is better—maybe significantly better—than Washington leads us to believe,” says Jim Bower, market analyst at Bower Trading. “The traffic, the construction, the road building, the movement of people. It looks strong to me.”

A robust economy usually leads to higher interest rates. As of this writing, Goldman Sachs estimated the odds of interest rates increasing in late September at 55%. Part of the firm’s reasoning can be attributed to comments by Federal Reserve Chairwoman Janet Yellen, who in August addressed the annual Economic Policy Symposium in Jackson Hole, Wyo.

“In light of continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Yellen said.

She made it clear that by the end of 2017, interest rates could range from zero to 4%.

The federal jobs report released after the Federal Reserve retreat didn’t have overwhelmingly good news. It showed the U.S. added 30,000 fewer jobs than expected for a total of 151,000 new nonfarm jobs. Although the gain proved weaker than anticipated, the report showed job increases this year have remained steady. That supports the notion interest rates will rise before Jan. 1.

Long-term interest rates are bound to go higher, Bower says.

“I can remember when guys had interest rates of 16% to 20%, and right now we have negative interest rates in parts of the world,” he says. “I don’t think that’s going to last.”

In the meantime, he recommends farmers pay extra attention to the market, which traditionally is wonky toward the end of the year, especially with a presidential election on tap.

 “I’ve been around a long time, and around election time, things get a little dicey,” he says. “You have to be extra careful, put some positions to the sideline and be a little more aware of the market. If you see an opportunity to lock in a good interest rate, do it.”

The Federal Reserve’s policy-making committee was scheduled to meet Sept. 20-21 in Washington and again in December.