Rate Hike Hypes Economy

OMAHA (DTN) -- Wednesday's interest rate hike was a yawner for markets and reflects a stronger overall U.S. economy.

Matthew Monteiro, vice president of finance and treasurer for Farm Credit of Mid-America, said the one-quarter-of-a-percent increase is supported by lower unemployment -- a 4.7% national rate -- and small increases in inflation.

"That indicates the strength of the economy," Monteiro said. "The ability for the Fed to increase rates meant the economy is finally at enough strength where they are able to do it. The positives in the economy outweighed the negatives. The market took it in stride."

DTN Senior Analyst Darin Newsom also cited how the market reaction was counterintuitive and some of the rationale behind that. (http://bit.ly/…)

The Dow Jones Industrial Average and S&P 500 both continued slightly upward on Friday as well.

For short-term financing, though, such as operating loans, the rate gave an uptick on those costs, though Monteiro said business lenders had been expecting these rate hikes to happen over the past year.

"Interest rates in the short term for financing seed, fertilizer and such, those have been increasing from some of the lowest historical rates we have seen to something still below historical trends.

"They have really seen those over the past year or so in anticipation of these interest-rate moves that the Fed makes," Monteiro said.

The Fed refers to the loan rates as "accommodative" right now. The Fund Rate for the Fed is now back to 1%, a spot it has not been at since October 2008. In summer 2006 -- before the real signs of a slipping economy -- the Fed rate was 5.25%.

So loan rates to farmers still remain significantly lower than long-term averages. Farmers who paid down debt during the high part of the cycle are not having to borrow as much, Monteiro said. Those farmers with higher debt-to-asset ratios, however, could be more affected.

"It will continue to be a drag for the folks on the margins," Monteiro said. "That will impact them a little bit more." He added, "A rate increase isn't going to be beneficial. It is not anything people particularly want to hear, but we are still below long-term market averages pretty significantly."

When the Fed raises rates, it can also become a driver for more consumption and loans in a good national economy because consumers and businesses want to get in and lock down that lower rate before there are significant upward swings in the loan rates. "That could be something that spurs people to refinance or get that loan," Monteiro said.

Still, Wednesday's actions by the Fed mark the second rate increase since December. If the economy keeps moving forward, the Fed has indicated it may raise rates one or two more times this year, Monteiro said.

"For some folks who are just getting into the farming business, this may be the first time they are going through a rate increase," Monteiro said. "They are used to exceptionally low rates."

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

(SK/AG)

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