An Urban's Rural View

Wow. The stock market sure liked the beginning of the Federal Reserve's "taper." The Dow rose nearly 300 points. Why, since the taper means the beginning of the end of the Fed's extraordinary economic stimulus, are investors so exuberant?

Lots of reasons, but one of the big ones is good news for farmers and ranchers as well as financial-market players: The Fed is signaling more clearly than ever that it will likely be awhile before it raises short-term interest rates.

It's been clear for some time that the Fed would start tapering -- slowing the pace of its bond purchases from the current super-stimulative $85 billion a month. But it wasn't clear how much, how fast.

By announcing that its first reduction would be to $75 billion a month, and future increases would probably be in $10 billion increments, the Fed assured markets that it wasn't going to do anything rash. Assuming the taper takes place in relatively even steps, the Fed would still be buying bonds until near the end of next year, and would have pumped an additional several hundred billion into the economy while it was tapering. Lots of fuel for markets there.

Lots of fuel, too, in the Fed's "forward guidance" on short-term rates. The benchmark rate the Fed targets, the federal funds rate, is currently below 0.25%. Fed officials had been indicating that they'd start raising the federal funds rate when the unemployment rate, currently 7%, is under 6.5%. Now they're saying they'll keep the rate low "well past the time" the jobless rate dips below 6.5%.

As Richard Fisher, president of the Dallas Federal Reserve, told our Ag Summit, members of the Fed's monetary policy committee are polled at each meeting about their expectations for the economy. Today's poll supported the view that rates will stay very low for a long time.

Of the 17 polled, only two believe the Fed will raise the federal funds rate next year, one fewer than at the September meeting. Twelve say 2015, and three think 2016, one more than in September. Ten of the 17 say the rate will be below 0.75 through the end of 2015.

You can't take that to the bank, of course. Federal Reserve chair Ben Bernanke, speaking at his last press conference, repeatedly said the Fed's decisions will be "data driven." If the economy were to take off or if inflation were to accelerate, the Fed could raise rates sooner.

Still, it's comforting for big borrowers to know that Fed officials aren't expecting that to happen. Fisher told the Ag Summit audience to take advantage of low interest rates because they won't last forever, and there's no doubt he's right. They won't. But judging from today's Fed action, they aren't going up in the next several months.

(ES)

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