Guest Columns

Perspective:
Industry Issues

What are interest rates doing?

Ty Rohloff

Ty Rohloff is a senior food and agribusiness lending relationship manager with Compeer Financial. He has more than 17 years of experience in the food and agribusiness industry, including five years as a lender with Compeer Financial. He is a guest columnist for this week’s issue of Cheese Market News®.

Going up — no need to read further! All kidding aside, there is another round of unknowns as to what the Federal Reserve will do when they meet the week of March 20. It has been curious to watch as the Fed signals movements in one direction while, at times, the broader markets seem to shrug off the direction or have a different sense on where things are going. As I make my way around to the businesses that read this article, rising interest rates come up 98% of the time. For some businesses, additional interest expense can have a serious impact on their profit and loss statements. Given the speed and increase experienced, some may have hedged against the rise while others may have been more cautious.

• The why

Chair of the Federal Reserve Jerome Powell has made it no secret since rates began rising that the target inflation rate was 2% or less. Economic report after report has seemed to defy the Fed’s best efforts at maximum effectiveness. While there are some signs of a turning ship, the impact has been slowly received. In researching where the Fed looks when adjusting rates, here are some of the impacts since hikes began last year:

• Personal consumption expenditures are up 5.4% year-over-year. This number is up from 5.3% in January 2022. Even after stripping out food and fuel, it is up 4.7% over the most recent 12 months.

• Consumer spending from the January report has seen a 1.8% increase.

• The U.S. unemployment rate saw a slight increase in February to 3.6%.Average hourly earnings slowed to 0.2% from 0.3% in January.

While these are some of the main factors, there are many other factors that drive the Federal Reserve’s decision-making. What looked like a peak rate of 5.25% could be 6% or higher by the end of the year.

In preparing for this, I ran across an article from 2021 with a headline that stated the U.S. likely hit peak inflation midyear with a course correction back to 2% before the end of 2021. That has not been the case. The areas in which inflation is showing up today have shifted since COVID-19. During the lockdown there was a runup in goods. As people have returned to more of a pre-pandemic normal, there has been a shift to services. Cars, groceries and housing costs are still elevated, but think what is happening on the service side.

United States services inflation accounts for 57% of the consumer price index. While we can probably rationalize the cost of a dozen eggs going down, a used car costing less or that new home coming down on the service side, is there a reason why things like hotel rooms, car insurance and vehicle repairs have not come down? They may over time, but it won’t happen overnight. Expectations for reduced costs, higher unemployment and lower wage gains need to be pared down to reality.

There are two last points to make that I think will bring home the volatility of this topic.

Housing prices have decreased while supply is still constrained. In my own neighborhood I watched three houses sell within a week or two of listing for well above what I thought they were worth. On a side note, our house should now be in the mid seven figures!

As of January 2023:

• Housing sales dropped 0.7% from December and were down 36.9% from a year ago, marking 12 consecutive months of declining sales.

• Inventory still hasn’t recovered from 2008, but there is a 2.9-month inventory supply, which is up from 1.6 months last year.

• The median existing home price was up 1.3% in January to $359,000 compared to a year ago, but down roughly 13% from the record high of $413,800 in June 2022.

• The distribution of outstanding 30-year mortgage rates estimate 70% of all carry a rate of 4% or below.

Lately, job openings have been of interest as well. Here are some thought-provoking statistics: The Job Openings and Labor Turnover Survey for the month of January was at 10.824 million openings, which is down 410,000 from December. While a decrease, it’s still a historically high number. That number equates to 1.9 job openings per every available worker. In other words, 5.13 million people are needed to fill open positions. As stated earlier, the Federal Reserve is having an impact on turning the ship. Mortgage rates are up, slivers of a drop in costs are being recognized and the consumer may be taking a second look at purchases or spending less on goods or services. It’s a big boat to move.

• Looking forward

We have plenty of opportunities to gauge the Federal Open Market Committee’s (FOMC) actions in 2023. The next meeting occurs on March 21-22, and then again in May with additional meetings scheduled in June, July, September, October, November and December.

Given the muted economic response of rising rates, some had expected the possibility of 50 basis point hikes in the next two meetings, bringing the peak rate to 5.75% before beginning to pull back before year end. But then the second and third largest bank failure in history began. Cheese Market News would need to provide another page to cover the details, but depositor fear paired with unrealized losses with a dose of significant non-insured deposits forced a major lightning-fast reckoning. Over the weekend the Federal Reserve worked overtime to reassure the markets of orderly institutions and safety nets. I wouldn’t call these traditional banking institutions, but rather those that catered to a new type of client who couldn’t get ahead of problems that surfaced in short order. The question now is what impact will this scare have on rates? As of March 13, Goldman Sachs, as the lone survey respondent, signaled an expectation that the FOMC would not raise rates at its upcoming meeting.

As the ship turns, you don’t need to follow every report, survey and news article. Instead, realize that rates will move up and down. Historically, we’re near longer-term averages and have a plan if the additional interest rate exposure has an adverse impact on your business. Like all things, we’re in a cyclical environment. Hopefully you’re reaping benefits of that strong consumer economy as we begin to enter a more normalized phase in rates, unemployment and spending.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

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