After raising the Fed Funds Target rate by 500 basis points over the last 15 months, the Federal Reserve opted to take a breather and left rates unchanged after its June meeting. While the departure from ultra-low interest rates was anticipated, not many expected how quickly and sharply conditions would adjust. This week we are stepping back to provide some context, especially pertaining to the farm economy.
Large (But Not Record-Breaking) Adjustments
One way to consider how the Fed’s recent activity stacks up with historical action is by measuring the change in the effective rate of the Fed Funds rate over a 12-month period (Figure 1). The Fed has raised the target range by 500 basis points since spring 2022, but the 12-month change peaked at 450 basis points.
Summarizing the significance of 450 basis points of change from May 2022 to April 2023 can be tricky. Consider the following statements:
- Fed Funds Rate increased at the fastest rate in more than three decades.
- Fed Funds Rate increased at a considerably slower rate than in the 1970s and 1980s.
Both are true statements and are a reminder that how much history (or data) is considered can affect our perceptions. To the first statement, since the late 1980s, large changes in the Fed Funds rate were around 200 basis points within 12 months. The chart also highlights that the Fed Funds Rates were stable – at nearly zero percent – after 2010. In early 2018, 12-month rate adjustments hit a high of 104 basis points.
To the second statement, the Fed funds rate experienced dramatic whiplash throughout the 1970 and early 1980s. In late 1973, 12-month changes reached a peak of nearly 600 basis points of increase. Nearly two years later, in 1975, rates had fallen by nearly 700 basis points within a year. Early in 1980, rates jumped more than 700 basis points before dropping. Then by the summer of 1981, rates had increased by 1,000 basis points (or 10 percentage points) within the year. On the downside, rates fell by nearly 800 points from September 1981 to August 1982.
Return To Average, But What’s Normal?
Figure 2 plots the average fixed interest rate on farm real estate loans since 1991. In the first quarter of 2023, rates were 7.4%, up considerably from 4.8% a year before and the all-time low of 4.6% observed in late 2021. While farm real estate loans briefly exceeded 6% in 2018, the last time they exceeded 7% was in 2008. However, prior to 2008, rates below 7% were rare.
Since 1991, or for more than three decades of data, the average fixed interest rate on farm real estate loans was 7.3%, which is almost exactly where current levels are (7.4%). That said, this raises the question, “What is normal or typical?”
While the average is around 7%, very little time has been spent there. Current rates are considerably higher than levels observed since 2010, which have averaged 5.6%. Conversely, current rates are below levels observed from 1991 to 2010, which averaged 8.4%.
Wrapping It Up
The current interest rate environment is unlike anything observed in recent years but is also not as extreme as historical conditions. In the 1970s and 1980s, interest rate adjustments were much more dramatic. Regarding the level of interest rates farmers faced, current conditions are comparable to the 2000s, while rates were higher throughout the 1990s.
In conclusion, the economy is adjusting to not only higher interest rates but also the prospect of more interest rate volatility. Both issues will be important to monitor and keep in mind when making future plans and projections. AEI Premium members can navigate this uncertainty using our decision-making tool, with several questions focused specifically on forecasting future changes to interest rates.