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Federal Reserve policy makers voted unanimously on Wednesday to deliver the first rate hike in three years, citing inflation that remains stubbornly above the central bank’s 2% target.
The decision, which boosted the federal funds rate by a quarter of a percentage point to a range of 3.75% to 4%, was widely expected after August inflation data remained sticky and as oil and fuel prices, including diesel, continue to climb as a result of the Iran war and other geopolitical factors. Also as expected, the decision drew fire from President Donald Trump, who argued in a Truth Social post later Wednesday afternoon that interest rates should be 1% or less “because we are the Best Credit in the World – BY FAR.”
Official interest rates, like the fed funds rate, are viewed by economists and policy makers as an instrument, albeit blunt, to affect the speed of the economy rather than a direct reflection of a nation’s creditworthiness. In the Fed’s case it’s a lever that aims to ensure price stability and full employment. That said, it’s no secret that politicians often prefer lower interest rates to boost short-term economic growth, but Trump’s repeated demands that the Fed, both under new Chairman Kevin Warsh and his predecessor Jerome Powell, cut rates are a break with decades-long policy norms meant to protect the Fed’s credibility.
Warsh told reporters the hike “removed a dose of accommodation so that financial and credit conditions would be more consistent with our ultimate objectives.” Investors and traders believe more accommodation will be needed to get inflation under control, and the Fed’s so-called “dot plot,” which gauges individual policy maker expectations for rates, show a majority penciling in another rate hike before year end (note: Warsh doesn’t participate in the dot-plot exercise).
- “Corn or soybeans or wheat”: A jump in long-term Treasury yields, which have jumped in reaction to resurgent oil and fuel costs, were also seen forcing the Federal Reserve’s hand. In his news conference following the decision, Warsh, in a nuanced response to a question on the causes of the rise in yields, mentioned agricultural commodities in the context of a broader run-up in commodity prices and, in particular, end-product prices.
- “The situation in hot spots around the world are driving long-term yields,” Warsh said. “It’s not simply spot prices of energy, or spot prices for corn, or soybeans, or wheat, but it’s the difference between those spot prices and so-called crack spreads. What that means for products that find their way into stores across the country.”
Warsh also cited a strengthening economy and increased competition for capital, particularly as a result of heavy bond issuance by artificial-intelligence hyperscalers, as factors in rising yields.
Recall that Warsh, in a speech at a monetary policy conference in Jackson Hole, Wyo., last month said that the “recent rise in overall commodity prices also bears watching.”
Market reaction: Stocks initially rose and Treasury yields fell after the rate announcement, but equity indexes later turned south and yields marched higher, with the 10-year Treasury rate pushing back above 5%, during Warsh’s news conference. Traders took the remarks as a sign further hikes are likely on the way.
“We expect rates to keep moving in this direction until there are clear signs that policy is becoming restrictive,” wrote rates strategists at BofA Global Research, in a note. “Lower oil prices would help moderate any future rate rise. But Fed tone today presents clear upside risks to our rate forecasts.”
- Watch the dollar: The prospect for further monetary tightening sent the U.S. dollar solidly higher versus most major rivals, with the ICE U.S. Dollar Index, a measure of the currency against six major rivals, up 0.6% for its highest close since late July. A stronger dollar can be a negative for commodities priced in the unit because it makes them more expensive to users of other currencies.
Market recap: Positioning on either side of the Fed policy announcement at 1 p.m. CT saw wheat and soybeans nudge higher, while corn lost some ground in consolidative trading. Downside for corn and soybeans was limited by continued rains and flooding in Iowa.
- December corn fell 1 ½ cents to $5.34 ¼.
- November soybeans rose 1 ¾ cents to $13.20 ½.
- December soft red winter wheat closed 2 ¼ cents higher at $7.30 ¾.
- December cotton fell 12 points to 84.36 cents.
- October live cattle fell $2.25 to $218.45. November feeders shed $5.80 to $323.10.
- October lean hogs dropped 40 cents to $78.675, hitting another 15-month low.
Farm bill clears committee: The Republican-led Senate Agriculture Committee on Wednesday approved a farm bill in a 12-11 party-line vote, with the legislation now headed to the Senate floor. Agri-Pulse noted that friction erupted among Republicans as Sens. Joni Ernst and Charles Grassley, both of Iowa, objected to Chairman John Boozman’s, R-Ark., decision to keep the bill closed to new amendments following its early August markup. The committee in August had rejected the bill in a party-line vote, due in part to the absence of Sen. Mitch McConnell, R-Ky., who was out due to a fall. McConnell returned to the Senate this week. Ernst was unable to win consideration of a measure to nullify farm animal containment laws, such as California’s Proposition 12, while Grassley wanted to push for an amendment on competitiveness in the meatpacking industry, Agri-Pulse reported.
- The bill includes a provision to allow year-round sales of the E15 fuel blend. The House in May passed standalone E15 legislation.
Trade financing guarantees: The U.S. International Development Finance Corp on Wednesday approved a $500 million trade financing facility that will help U.S. companies access emerging markets in South America, Southeast Asia and Africa, the agency’s chief executive, Ben Black, said, according to Reuters. The facility, approved by the DFC’s board, will offer counter-guarantees in partnership with the World Bank’s International Finance Corp, its private-sector arm, and its Global Trade Finance Program, Black told Reuters.
Ethanol production steady: The U.S. produced 1.10 million barrels a day of ethanol in the week ended Sept. 11, the Energy Information Administration reported Friday, unchanged from the previous week. Output was up 4.2% from the same week last year. The four-week average rose 0.3% to 1.11 million barrels a day.
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