An Urban's Rural View

Are we there yet?

It isn't just kids in the back seat who ask that question. Farmers and ranchers, tantalized by the prospect of lower interest rates, have been asking it, too.

Yesterday they got an answer: almost. We're not there yet, but we could well be in September.

The answer came in a post-meeting statement from the Federal Reserve's rate-setting Federal Open Market Committee. Compared to previous statements, yesterday's one suggested the committee is more sanguine about inflation coming down and more concerned about the economy slowing.

In a press conference after the meeting, Fed chair Jerome Powell was more direct. "The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate," Powell said. "A reduction in the policy rate could be on the table as soon as the next meeting in September."

Ever since last December, when Federal Reserve policymakers first started sounding dovish on inflation, financial markets and business borrowers have been counting the days. Hopes for cuts early in the year were dashed by uncooperative inflation readings for the year's first few months.

Fed officials have said again and again that to lower rates, they need sufficient confidence that inflation is coming down to their 2% target. For the first three months the rate was above 3% and in March it was higher than in February.

But in June, the consumer price index fell 0.1% from the previous month and was up only 3% year-on-year. (https://www.bls.gov/…) The Fed's preferred measure, the Personal Consumption Expenditures Index minus food and energy, was up 2.6% in June. (https://www.bea.gov/…)

Yesterday's FOMC statement referred to inflation as "somewhat elevated." (https://www.federalreserve.gov/…) That indicated less concern about inflation than previous statements, which called inflation "elevated." It means Fed policymakers are more confident inflation is on its way to 2%, which would make them more willing to cut interest rates.

While inflation has been coming down, unemployment has been inching up, rising a tenth of a percentage point a month in each of this year's first six months. (https://ycharts.com/…) The economy isn't in recession; it rose at a 2.1% rate in the first half and has created more than 200,000 jobs in five of this year's first six months. But the rise in the unemployment rate suggests a tighter labor market, which is a recession warning signal.

Congress has given the Federal Reserve a dual mandate -- stable prices and maximum employment. During the recent bout of inflation the FOMC said it was "highly attentive" to inflation. Reflecting the more optimistic outlook for inflation and more pessimistic employment outlook, yesterday's statement dropped the "highly" and said "the Committee is attentive to the risks to both sides of its dual mandate."

All signs, then, are pointing to a cut in the Fed's benchmark rate at its next meeting in September. Markets expect a quarter-percentage point cut from the current range of 5.25% to 5.5%. Most expect there will be at least one other cut this year and some think there will be two more cuts in 2024 and still more in 2025.

There is, then, a possibility that by the time farmers negotiate their operating loans for their 2025 crops, interest rates could be significantly lower than they are now. It's not a certainty, to be sure. A resurgence of inflation or a stronger economy could interfere with the prospect of lower rates.

But at the moment, at least, there's pretty good reason to think we're almost there.

Urban Lehner can be reached at urbanize@gmail.com

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