The Federal Reserve raised its benchmark interest rate by 75 basis points for a second straight month and the fourth hike since the monetary tightening phase began in March. The Fed funds rate now stands at a range of 2.25% to 2.50%, up 225 basis points since March.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the post-meeting statement said. The Fed will remain “highly attentive” to inflation risks, but noted that while the jobs market remains strong, “recent indicators of spending and production have softened,” signaling the aggressive rate hikes since March are beginning to impact the economy. Still, the policy rate is now at a level most Fed officials feel has a neutral economic impact.
The post-meeting policy statement gave little explicit guidance about what steps the Fed may take next, a decision that will depend heavily on whether upcoming data shows inflation beginning to slow.
Another “unusually large” increase in interest rates may be appropriate at the September monetary policy meeting, but the decision will be determined by economic data between now and then, Fed Chair Jerome Powell said during his post-meeting press conference. The rate increase decision will be determined by whether the Fed sees firm evidence inflation is beginning to abate. Powell says the Fed would like to get monetary policy to a “moderately restrictive level by the end of this year – somewhere between 3.0% to 3.5%.” He says the committee currently sees “further rate increases” next year.
As for the U.S. economy, Powell says he doesn’t think it’s currently in recession, but the path to a soft land has “clearly narrowed” and may narrow further. He said policymakers believe the economy needs a period of below-potential growth to create sufficient slack to lower inflation.
Potential impacts of higher interest rates on farmland, cash rents
Former LandOwner Editor Mike Walsten Mike Walsten says: “I do not see a 1980’s-style land depression because both farmers and lenders remembered what happened. No purchases on high leverage. Low leverage instead, which means they can handle a 20% correction and breakeven returns on production without defaulting. We saw that ability to survive in the recent correction following the 2013 highs.”
Walsten provides some farmland buying math: “You can get farm loans for 4.5% to 6%, depending on your history with your lender and how much equity you are putting into the purchase. With inflation at 9%, your ‘real’ interest rate is low, not high. If you can cash flow a 2% to 3% annual return and inflation remains at 3% or higher, you’re ahead to buy farmland. Also, if you can get a non-recourse loan… probably dreaming… go for it.”
On rents, landowners will push to keep them high as they want to keep their return high enough to cover both a return on equity… cap rate… and the appreciation in values, Walsten details. “Renters will push for lower rates as their borrowing costs and input costs rise. Result: Usual tug-of-war between landowners wanting as much as possible and tenants as little as possible. Strong personal relationships between tenant and landlord can help ease the negotiation process and tip the scales in the tenant’s favor.”
Land values will likely continue to rise but at only a moderate rate for the next year or two, Walsten says. As input costs and increased production drives commodity prices down, a correction of 10% to 20% in land values will likely occur that could take three to five years, he adds. “Years three through five would be a good time to increase land purchases. The number of farms coming to market in the year ahead will slip as those who needed to sell land… mainly estate settlement people… rushed their ground to market the last year… fall through late spring. Thus, supply will tighten again by late 2023, keeping prices firm. Meanwhile, non-farm investors will be active as they seek hard assets to offset inflation, produce ‘real’ annual return and provide a safe haven for capital from the wreckage under way in financial instruments due to inflation.”