Rate Cuts Could Provide Some Relief for Agriculture

By Ryan Hanrahan, University of Illinois' FarmDoc project - 09/25/2024

Reuters' Howard Schneider and Ann Saphir reported that "the Federal Reserve cut interest rates by half of a percentage point on Wednesday, kicking off what is expected to be a steady easing of monetary policy with a larger-than-usual reduction in borrowing costs that followed growing unease about the health of the job market."

"'The committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance,' policymakers on the U.S. central bank's rate-setting committee said in their latest statement, which drew a dissent from Governor Michelle Bowman who favored only a quarter-percentage-point cut," Schneider and Saphir reported.

"Policymakers see the Fed's benchmark rate falling by another half of a percentage point by the end of this year, another full percentage point in 2025, and by a final half of a percentage point in 2026 to end in a 2.75%-3.00% range," Schneider and Saphir reported. "The endpoint reflects a slight upgrade, from 2.8% to 2.9%, in the longer-run federal funds rate, considered a 'neutral' stance that neither encourages nor discourages economic activity."

CNBC's Jeff Cox reported that "in assessing the state of the economy, the committee judged that 'job gains have slowed and the unemployment rate has moved up but remains low.' FOMC officials raised their expected unemployment rate this year to 4.4%, from the 4% projection at the last update in June, and lowered the inflation outlook to 2.3% from 2.6% previous. On core inflation, the committee took down its projection to 2.6%, a 0.2 percentage point reduction from June."

"However, Powell and other policymakers in recent days have expressed concern about the labor market," Cox reported. "While layoffs have shown little sign of rebounding, hiring has slowed significantly. In fact, the last time the monthly hiring rate was this low - 3.5% as a share of the labor force - the unemployment rate was above 6%."

Progressive Farmer's Katie Micik Dehlinger reported Tuesday that "'Wednesday's half-percent rate cut is a good start for easing price pressures on agriculture, and more is needed ahead,' DTN Lead Analyst Todd Hultman said. 'As has been true the past year, much will depend on oil prices and jobs numbers moving forward.'"

"The Federal Reserve board voted for the more aggressive rate cut, reflecting a shift in concerns from taming inflation to supporting employment," Dehlinger reported. "'Higher interest rates have hit the ag sector much harder than the rest of the economy,' Hultman said."

"Interest rates on farm loans have been at multi-decade highs for the past two years, but in addition to increasing farmers' operating costs, higher interest rates also helped fuel fund managers' record short positions in corn, soybeans and wheat earlier this year," Dehlinger reported. "'I'm not going to blame the lower corn and soybean prices on speculators, but they certainly add to and exaggerate the downward pressure on our commodity prices,' Hultman said. 'Lower interest rates could help provide some relief to farmers in a couple of ways.'"

Brownfield Ag News' Carah Hart reported the day before the Federal Reserve cut rates that "the chief economist at Farmer Mac says there should be immediate relief for production credits when the Federal Reserve lowers interest rates. Jackson Takach says the cost of production credits should decline 1:1."

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