What Would You Do?

Imagine you’re a member of the Federal Reserve Bank Open Markets Committee (OMC) responsible for setting the federal funds rate. The federal funds rate, effectively the rate on short-term interbank loans, is a monetary policy lever used by the Federal Reserve to influence the economy. Changes in the rate quickly ripple through the economy and influence interest rates banks and other lenders charge on loans and affects rates of return on U.S. Treasury bills and savings.

The Federal Reserve Act requires the Federal Reserve to conduct monetary policy to promote maximum employment and stable prices. The requirements are often referred to as the “dual mandate,” keep both inflation and unemployment rates low and stable. If the economy is running too hot—rapid economic growth, low unemployment, and/or high inflation, the Federal Reserve will raise rates in an attempt to slow it down. Alternatively, if slow economic growth, deflation, and/or high unemployment threaten—the Federal Reserve will lower rates to spur the economy. The central bank seeks to let economic data guide its actions when making its decisions whether to raise/lower rates and remain independent from political pressure and other influences.

The OMC is scheduled to meet September 17 and consider rates. The latest data on the economy is mixed. Jobs data suggest the economy is creating fewer jobs. The unemployment rate has been ticking upwards and applications for unemployment benefits are rising. The latest unemployment rate was 4.3%, the highest since late 2021 but still low from a historical perspective. Last week’s inflation report showed rising inflation. The Labor Department reported the Consumer Price Index (CPI) registered 2.9%, up from a year earlier and the highest level since the start of the year. The core index, leaving out food and energy prices, was 3.1%. The readings came in about as forecasters expected but remain above the Federal Reserve goal of 2.0%. Thus, employment data suggests a reduction in rates while inflation data points toward keeping rates steady.

FIGURE 4. U.S. UNEMPLOYMENT & INFLATION RATE

Source: FRED, St. Louis Federal Reserve Bank, using data from the Bureau of Labor Statistics

Regardless of what the data says, the Federal Reserve is under tremendous political and market pressure to reduce rates. President Trump has made it clear he wants the central bank to lower rates, primarily to reduce the interest cost on the federal debt. Moreover, financial and equity markets are already pricing in several rate reductions for the remainder of the year. Consumers, though, remain wary of inflation citing it as a top concern. And economists and forecasters remain concerned the full impact of the additional tariffs on prices has yet to be seen. A rate reduction could further fuel inflation and the economy see a repeat of the 1970s when the Federal Reserve bowed to pressure from President Nixon to reduce rates. The rate cuts then contributed to double-digit inflation and high unemployment, a condition referred to as “stagflation.”

Any Federal Reserve action will have implications for agriculture. A rate cut could lower borrowing costs and pressure land values upwards. But higher inflation spurred by a cut could push already high input prices even higher. Steady or higher rates would increase borrowing costs but temper inflation and rising input costs. What would you do?