TFM Perspective 06-17-2022


Rising Rates

This week the Federal Reserve raised interest rates by 75 basis points in a major move to combat inflation. In addition, Federal Reserve Chair Jerome Powell signaled another rate hike next month. This latest increase is the biggest move since 1994, showing just how rampant inflation has become. The causes may be many, yet one can directly view the miscalculation by the Fed and the current administration. Both insisted, in lock step,  that inflation was only temporary and a direct result of supply chain disruptions. The bond market is currently suffering its worst collapse in half a century.

It was inevitable that interest rates would eventually rise. For nearly a decade, rates have been hovering near 0% with only minor up and down changes by the Fed. However, it is the speed at which inflation has kicked in that has the power to be rapidly changing their course of action. Namely, three out-of-the-ordinary events have been contributing. One is massive federal spending to deal with effects of Covid-19. One can argue this is right or wrong – well, it is what it is. The other is a self-induced energy crisis by the administration, which decided to go “all in” to combat climate control with an end goal of strangling the users of fossil fuels. The critical mistake here is the lack of contingency planning for the “what if something goes wrong” scenario. And that leads to the third event, the invasion of Ukraine by Russia. America went from energy independence to now “depending” on others. World energy prices have skyrocketed. Energy is a major component to production of, well, everything related to commodities. Russia and others are becoming rich, while Americans struggle with no apparent end to rising prices.

While outguessing what will happen in the future is challenging, history may teach us that when trends develop, they often move in a direction that exceeds most of our capacities to comfortably imagine. Who would have thought 20 to 30 years ago that interest rates would go as low as they did this past decade? Still, everything is relative. When 30-year mortgage rates dropped from double digits to less than 5%, it seemed unimaginable this could happen, let alone drop to near 2%. Now that rates are on the rise, 5% seems too high. Get ready. Potentially, higher to much higher rates are on tap, as the Federal Reserve is reverting to the Reagan-era approach of rapidly rising rates to cool inflation. Now may be the time to act if you are borrowing. With expected higher rates and a need to refinance, have a conversation now with your lender. The tide has turned and the argument of higher rates in the future is strengthening. Historically, rates are still low. If the expectation for higher rates turns out to be wrong, it means rates will have fallen, and the opportunity to lock in lower levels will present itself.

Prepare yourself and your operation. Visit with a professional to understand the risks and rewards of taking action now, or waiting.

If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.


Bryan Doherty

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