An Urban's Rural View

Only a few weeks ago, financial markets were pricing in two Federal Reserve interest-rate hikes in 2019. Today they're pricing in none. Indeed, they're predicting that the next move, probably in 2020, will be a rate cut. (https://blogs.wsj.com/…)

If the markets are right, this is good news for folks who borrow money to finance their businesses, a category that includes many farmers and ranchers. But are the markets right?

Answer: Maybe, but don't count on it. Yes, the Fed is putting rate increases on hold. Whether it's through with them depends on what happens to the economy.

"Often wrong but never in doubt" is a reproach that can be directed at markets as well as people. Markets -- how shall we say -- sometimes express more certainty than is warranted. In fairness, markets typically forecast more accurately than economists or computers. But they're far from 100% accurate.

To decide whether markets are right about the end of rate hikes, we need to review the latest pronouncements from the Federal Reserve. Up until its last meeting in late January the Fed, which raised short-term interest rates four times last year, had been saying that "some gradual further increases would be warranted." In January, it omitted that language from its meeting report. (https://www.nytimes.com/…)

At his post-meeting press conference, Fed chairman Jerome Powell said, "The case for raising rates has weakened somewhat." Asked whether the next move was more likely an increase or a cut, he said, "It depends entirely on the data." (https://www.wsj.com/…)

A Bloomberg reporter pressed Powell on whether by being "patient" he meant the Fed was done raising rates. "Is it fair to characterize this as not a pause in a tightening cycle, but the end of the tightening cycle now -- a new regime for the Fed?" the reporter asked. "And, if not, can you put a time frame on 'patient'?" (https://www.federalreserve.gov/…)

Powell dodged and weaved. "So, patience -- I think we're going to know in hindsight, because the length of this patient period is going to depend entirely on incoming data and its implications for the outlook," the chairman said. "So that's going to be -- so it's hard to say, you know, it's hard to think of what to call it at this point or how to label it."

This was murky enough to leave room for interpretation, and the headline writers at the New York Times and Wall Street Journal came down on different sides of the question. "Fed Signals End of Interest Rate Increases," proclaimed the Times' headline. "Fed Signals Hold on Rate Increases," was the more cautious Journal headline.

Now, headline writers have been known to oversimplify, and the story over which the Times' headline appeared did not justify the use of the word "end." In fact, the verb in the first sentence of the story was "suspend."

Give the Times headline writer this, though. He may have ignored the subtleties of the Times' article, but he came to the same conclusion the markets reached.

The question is how the market reached that conclusion. The answer is that the markets take Powell at his word when he says the Fed is data-dependent. They seem sure the data is saying the economy is going in the tank.

Which, it must be stressed, is not the Fed's reading. The Fed thinks the economy is still strong, though it acknowledges there are "cross-currents," in particular slow growth in China and Europe that could affect American exports.

If the Fed's view turns out to be too optimistic and the markets turn out to be right about the economy, rate hikes are history and the next move will indeed be a cut. But that's an "if," not a certainty.

If, instead, the Fed's view prevails and the economy remains strong, we could see another interest-rate hike later this year.

Even if that happens, though, the news is not all bad. For the Fed seems very close to being done raising rates, even if it's not completely done. Powell is now saying that interest rates are "in the range" of the neutral level the Fed has been seeking.

That's a change, and a welcome one. It means the next hike, if there is one, could well be the last one in this cycle, with rates peaking at historically low levels. For business borrowers, that would be a not-small favor to be thankful for.

Urban Lehner can be reached at urbanize@gmail.com

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