Federal Reserve Still Looking at Hiking Benchmark Interest Rate

BY DAN GRANT, FARM WEEK NOW

The Federal Reserve continues to signal its intent to raise the benchmark interest rate, but the key unknowns that keep analysts and economists guessing are “when” and “how much.”

The vague style of “Fedspeak” offered few clues as Federal Reserve chairwoman Janet Yellen testified to the Senate Banking Committee about the current state of the economy.

“At our upcoming meeting (in March), the Fed will evaluate whether unemployment and inflation are continuing to evolve in line with expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” Yellen said in her testimony.

The Fed raised interest rates by a quarter-point in December, the first increase since it made the same adjustment to rates in December 2015.

Central bankers started this year with expectations of three additional quarter-point rate increases in 2017, but the average guess now suggests a lesser chance the Fed will increase rates in March with a greater chance of a bump in July and again in December, according to Todd Kuethe, University of Illinois ag economist.

“The Fed has been pretty consistent the last two years with plans to raise the rates,” Kuethe told FarmWeek.

“But there’s been disagreement about what’s the pace,” he continued. “I think the rate increase (this year) will be similar to last year – a measured and slow process.”

The Fed targets inflation at around 2 percent and unemployment in the 4.5 to 5 percent range as triggers to raise rates.

But factors such as underemployment, an aging workforce and technology replacements could weigh on both economic indicators.

“The economy isn’t growing as fast (as some expected),” Kuethe said. “The Fed views inflation as a puzzle.”

Overall, though, Kuethe believes the indicators are close enough to the marks to trigger another rate increase this year. If realized, he doesn’t expect it to have a major impact on the farm economy.