Ag borrowers are not likely to see immediate effects on short-term interest rates resulting from last week’s decision by the Federal Open Market Committee’s (FOMC) decision to raise the federal funds rate from 1.75 percent to 2 percent.
The rate hike was widely expected, with a likelihood of 98 percent, says Matt Monteiro, vice president of Finance and Treasurer, Farm Credit-Mid-America, Louisville, Ky.
“The big question is if there will be a total of three increases this year, or a fourth in December,” Monteiro said Monday in a phone interview with Farm Press.
“The increase was anticipated and already built into short-term market interest rates,” says Monteiro. “Market interest rates are based on expectations. The market anticipated FOMC’s action.”
The increase in the shortest-term loan category, or the overnight borrowing rate, affects such short-term finance instruments as operating loans and lines of credit. Long-term financing, such as mortgage and capital improvements likely will not be affected by this increase, which is the latest in several bumps since the Fed began tightening monetary policy in December 2015.
“Those long-term loans are influenced more by expected inflation and economic growth,” Monteiro said. “The outlook released by the Fed accompanying the rate announcement showed little change in the long- term U.S. growth expectations, which were estimated at 1.8 percent. Inflation is at or near the Fed’s 2 percent target.”
The Prime rate increased along with the Federal Funds rate, rising from 4.75 percent to 5 percent. “Any loan tied to Prime will see higher interest costs after this Fed action. LIBOR (London Interbank Offered Rate) changes daily so loans based on it have been increasing more gradually rather than in the 25 basis point intervals we’ve seen with the Prime,” he says.
He says longer-term fixed loans, such as 20 years, are influenced by longer-term economic expectations, which have not changed materially. Monteiro says the committee based the decision to raise the target range for the federal funds rate on “a wide range of information, including labor markets, inflation expectations, and international developments.”
The committee concluded that the U.S. labor market has continued to strengthen, and economic activity has been rising at a strong rate. Job gains have been strong and unemployment has declined. Recent data show household spending has picked up and business fixed investment continues strong growth.
The committee concluded that overall inflation “for items other than food and energy has moved close to 2 percent.” Longer-term inflation expectations have changed little.
He said the committee noted in its June announcement: “Risks to the economic outlook appear roughly balanced.”
Monteiro said the yield curve has continued to flatten, causing a lower interest rate premium to borrow long term vs short term.
“Farm Credit Mid-America, which serves Indiana, Ohio, Kentucky and Tennessee, has a capital score over 20 and $4.5 billion of equity,” he says. “That is about twice as much as a well-capitalized financial institution. As a cooperative with such a strong balance sheet, we are positioned well for growth and to support our Patronage program, which paid out $87.9 million to eligible borrowers in March. That was a 216 percent increase over last year’s payment.”
The Patronage program is approved annually by the cooperative’s member-elected board, and the payout is determined at the end of the year. “We’re having another great year, financially. When we’re successful, our customers are successful, and vice-versa,” he added.
“We have always worked with our borrowers to be set up for success,” he adds. “Farmers have adjusted well to the downturn of the past three years. Since they’re owners of the cooperative, our incentives are in alignment.”