An Urban's Rural View

In recent months, the Federal Reserve has lowered its benchmark interest rate a full percentage point -- 100 basis points, in market parlance. Unfortunately for farmers, ranchers and other business borrowers, Fed policymakers are predicting they'll slow the pace of cuts in 2025 and 2026.

A couple of Fed officials are even speculating the central bank may be through cutting for the time being.

Understand, these are predictions, not policy statements. Fed policymakers say their decisions are "data driven," so if the employment and inflation statistics change one way or the other, both predictions and policy could change.

But in their December Summary of Economic Projections, the 19 members of the rate-setting Federal Open Market Committee indicated they're expecting two quarter-point interest rate cuts in 2025, down from the four they expected in September, and two more in 2026 (https://www.federalreserve.gov/…). Should those projections prove accurate, the benchmark federal funds interest rate at the end of 2026 would fall in the 3.25% to 3.5% range.

Moreover, the median of the 19 fed-funds-rate forecasts does not fall below 3% even in 2027, only reaching 2.9% in an unspecified "longer run." In September, the median projection was for 2.9% by 2026.

Interest rates on ag loans have inched down a little since the Fed began cutting four months ago, at least in the states covered by the Federal Reserve Bank of Kansas City. But operating loan rates are still closer to 9% than 8%. As recently as 2021 they were below 5%. (https://www.kansascityfed.org/…)

In September, former DTN Lead Analyst Todd Hultman said, "In my mind, we really need to get the federal funds rate back under 3% again to help take some of the pressure off the ag economy." (https://www.dtnpf.com/…) If the Fed forecasters are on target, the interest-rate pressure on the ag economy may have three or more years to run.

Why is the Fed pulling in on the reins? At his Dec. 18 press conference (https://www.federalreserve.gov/…), Fed Chairman Jerome Powell mentioned four reasons:

1 -- The economy and the labor market are perking along nicely; they don't require as much stimulation as Fed officials thought in December.

2 -- Inflation is stickier. It's below 3%, a big improvement, but instead of continuing to move towards the Fed's 2% target, it has ticked up a hair. Worse, the Fed rate-setters project it will remain at around the mid-2s level next year.

3 -- Donald Trump was elected president. His tariffs and deportations could prove inflationary.

4 -- We may be nearing the "neutral" interest rate -- the rate when the economy has achieved the Fed's goal of full employment and stable prices. No one knows for sure where this rate is; it rises and falls with economic conditions. The current Fed funds rate between 4.25% and 4.5% is at the top of the range of economists' current estimates.

Given all this, especially the stickiness of inflation and the prospect of no improvement next year, you have to wonder why the Fed is contemplating any rate cuts at all.

Indeed, one FOMC member, Federal Reserve Board of Cleveland president Beth Hammack, cast a rare dissenting vote against the Fed's December rate cut. Another, Dallas Fed President Lorie Logan, thinks neutral could be "very close to where the federal funds rate is now." (https://www.wsj.com/…)

And the first question Powell was asked at his press conference was why rate cuts would be appropriate in 2025 if no progress is anticipated in reducing inflation.

To Powell, going slow makes more sense than stopping. He pointed to uncertainties in the four reasons:

-- Though the unemployment rate is low, the job market is cooling.

-- While inflation is sticky, "the story of why inflation should be coming down is still intact."

-- Fed officials don't know how far Trump will go with deportations and tariff cuts and what the effects of those policies will be. A few of the 19 tried guessing. Most didn't.

-- The only sure thing we know about the neutral rate is the Fed is 100 basis points closer to it.

These uncertainties call for caution, Powell said. "It's not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down."

In the coming months, optimists will focus on the monthly inflation reports. If the inflation rate starts moving again towards 2%, and Fed officials feel confident it will continue in that direction, faster cutting could be back on the table. Business borrowers have to hope that's what happens.

Urban Lehner can be reached at urbanize@gmail.com

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