The Federal Reserve announced its decision to keep interest rates unchanged on Wednesday, while also signaling two more rate hikes are likely yet this year. As the U.S. central bank continues to adjust its plan to fight inflation, farmers are dealing with interest costs that have doubled year-over-year.
Wednesday’s interest rate decision broke a streak of 10 straight meetings where the Fed announced an interest rate hike. During the two-day meeting, officials said another half-a-percentage-point hike is likely before the end of the year. The decision to pause the rate hikes this month was due to a slower decline in inflation, but also a stronger-than-expected economy.
More hikes or not, Scott Rueff, regional vice president over the north region for Ag Resource Management (ARM), says increased interest rates are having a heavy impact on operating costs today.
“We don’t have crystal balls as to what the interest rate environment is going to do in the next 12 to 18 months, but what we do know is from February of 2022 to today, we’ve seen a 500-basis-point rise in interest rates. What does that mean for the farmer? They are used to having prime at 3.25% for the last 10 years. Today, prime is at 8.25%.”
He says with a 5 percentage-point hike in rates, farmers need to evaluate the impact interest costs will have on their operations.
“What we know is that their interest cost is going to double year-over-year, and that can put significant pressure on an operation,” Rueff says. “A farmer needs to look at what the interest cost is for their operation versus what their gross income is. And really, they’ve been able to kind of build debt and not have to worry about that in recent years, and that may come back to hurt them a little bit at the end of the year.”