At its May 3 meeting, the Federal Open Market Committee raised the Federal Funds rate by another 25 basis points, making the target Federal Funds rate range from 5% to 5.25%.
Brady Brewer, of Purdue University’s Center for Commercial Agriculture, said in a report that the FOMC has consistently increased the Federal Funds Rate for more than a year.
While the raises have been historical in terms of how fast the FOMC has increased the Federal Funds rate, five percentage points in a little over a year, the US still is below the February 2007 rate of 5.26%.
ECONOMIC SLOWDOWN POSSIBLE
Chairman Jerome Powell said during the latest FOMC meeting that, “Reducing inflation is likely to require a period of below-trend growth and some softening in the labor market conditions.”
Brewer said, the quote seems particularly relevant as many people are asking if the economy is on the cusp of slower growth. This indicates the Federal Reserve knows the increase of interest rates likely will slow the economy for the foreseeable future, and its members are all right with it.
While the Committee likely would like to avoid that, it has long been known that controlling inflation is the FOMC’s primary mandate over a full labor force, Brewer said. The FOMC is signaling that some level of slower economic growth is okay to combat inflation.
HIGHER RATES EQUAL “HEADWINDS”
A second Powell quote Brewer highlighted was, “In addition, the economy is likely to face further headwinds from tighter credit conditions.”
Although Chairman Powell did not indicate specific data backing up his claim, there have been numerous reports of banks across the country tightening credit and having less money to lend overall, reducing the amount of funding for investments and growth.
AGRICULTURE IMPLICATIONS
Implications for farms and agribusinesses are twofold, Brewer said. First, agribusinesses providing credit to farmers for inputs or other operating expenses may see increased demand in the near future.
Brewer thought much of the tightening credit Chairman Powell mentioned has not been in the agricultural sector. However, if banks are looking at their deposits and the amount of funds they have to loan, it is possible that overall lending could tighten, including agriculture.
Secondly, farms or agribusinesses looking to expand or invest in their businesses will find credit conditions getting tighter in the near term, Brewer said. Additionally, there also could be additional increases in the Federal Funds rate, further increasing the cost of borrowing.
Having a plan for asset replacements and investments will ensure the cost of debt is minimized in the new interest rate environment, Brewer said.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $171.05 per cwt to $177.28, compared with last week’s range of $171.00 to $179.10 per cwt. FOB dressed steers, and heifers went for $270.70 per cwt to $274.36, compared with $271.48 to $278.17.
The USDA choice cutout Tuesday was down $2.51 per cwt at $299.47 while select was off $0.36 at $284.35. The choice/select spread narrowed to $15.12 from $17.27 with 120 loads of fabricated product and 16 loads of trimmings and grinds sold into the spot market.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.73 to $1.88 a bushel over the Jul corn contract, which settled at $5.81 1/4 a bushel, down $0.11 1/4.
The CME Feeder Cattle Index for the seven days ended Monday was $202.07 per cwt, down $0.04. This compares with Tuesday’s May contract settlement of $205.70 per cwt, down $0.80.