ESFPA E-News

The Federal Reserve's Actions on Interest Rates and What it Means for Farm Credit East Borrowers

The U.S. Federal Reserve (“the Fed”) has raised the Federal Funds target rate 2.25% from near zero to a range between 2.25% and 2.5% since the beginning of the year. This has, in turn, resulted in corresponding interest rate increases for businesses and consumers on everything from bank loans to credit cards. Why is the Fed acting this aggressively, do we expect it to continue and what does it mean for Farm Credit East borrowers?

The Fed’s Mandate and Interest Rates

The U.S. Federal Reserve System – America’s central bank – has a dual mission: It is tasked with the dual mandate of pursuing the goals of maximum employment and price stability. It does this by using a variety of policies to influence the overall U.S. economy.

One of the main tools used in pursuit of this mandate is raising or lowering the Federal Funds target rate (the rate at which commercial banks borrow and lend overnight funds to the Fed), to either expand or contract the overall money supply and raise or lower interest rates across the economy. This, in turn, affects both business and consumer spending and investment and ultimately can accelerate or cool economic growth.

Low interest rates can boost spending and investment, raise GDP growth and encourage the hiring of more workers, lowering unemployment. However, a robust economy with low unemployment is likely to lead to price increases, leading to high inflation.

To combat high inflation, the Fed typically raises interest rates in an effort to cool the economy and reduce pressure on prices. While price stability is generally considered a good thing, if the economy tilts into recession, businesses may reduce hiring, and unemployment will rise. Thus, the Fed is trying to “thread the needle” by managing interest rates and the money supply at a level that leads to inflation of around 2% per year, while simultaneously achieving the maximum employment level that the economy can sustain over time. This is extremely difficult to achieve in practice, and the Fed sometimes over- or under-shoots this target.

Recent History and the Current Economy

Following the pandemic-related shutdowns, the economy contracted by nearly one-third, and unemployment soared to a peak of nearly 15%. In an effort to avoid an extremely severe recession, the Fed acted aggressively by dropping interest rates sharply. This, coupled with unprecedented federal stimulus spending, basically achieved that goal: U.S. GDP growth rebounded, and unemployment rapidly retreated, eventually returning to pre-pandemic levels.

The problem is that these actions have contributed, along with supply chain disruptions throughout the economy, to inflation increasing to a rate not seen in about 40 years. So, the Fed, just recently trying to steer the economy away from recession, now faces the difficult challenge of trying to constrain inflation. This was made especially difficult because of the compressed timeline between the shutdown and the recovery, as well as the unprecedented nature of the pandemic. Rising inflation started to appear as early as the middle of 2021, but the situation is complicated: Some of the upward pressure on prices was driven by surging consumer demand, but another major factor was supply-chain constraints related to the pandemic.

Many economists felt that these supply-chain pressures would be temporary, and that inflation would cool on its own in a matter of months. This belief led to the Fed waiting to act on inflation, and, in retrospect, they may have waited too long. By the time the Fed started raising interest rates, a quarter-point rate hike in March 2022, inflation had exceeded their target for over a year, and had reached 8.5%, a level that would prove challenging to reduce. Looking back, some of the Fed’s own economists admitted they may have put too much faith in the hope that rising prices were temporary. Randal Quarles was quoted in the New York Times saying, “It was a complicated situation with little precedent – people make mistakes.”

What Comes Next

It’s worth noting that the current prime rate — 5.5%, following the July increase — remains moderate by historical standards. The prime rate was 8.25% in 2007 and was at 5.5% as recently as 2019. This means that the Fed still has a lot of room to raise rates further if needed to slow inflation.

Already we are starting to see the economy cool off. The advance estimate of second-quarter GDP growth showed a contraction of -0.9% (annualized), the second consecutive quarter with negative GDP. While the Fed’s mandate includes price stability and maximum employment, it does not mandate robust economic growth. A looming recession may not convince the Fed to take their foot off the brakes as long as inflation remains elevated, and the job market remains tight. Ultimately, because a slowing economy can reduce inflationary pressure, falling GDP could be considered a result of the Fed’s actions.

So where will the Fed go from here? The Fed’s own projections suggest we’re likely to see steady, additional rate increases over the coming 12-18 months as long as inflation remains elevated. Longer-term, rates may come back down, but in the short- to medium-term, they show no signs of reversing course, and their delay in raising rates may require them to act more aggressively than they otherwise would have.

For his part, Federal Reserve Chairman, Jerome Powell, has indicated that the Fed is more concerned at this point about the risk of failing to stop high inflation than the risk of raising rates too high and causing a recession.

The bottom line: Businesses would be smart to plan for more rate increases and sustained higher interest rates for the coming 1-2 years. This will be accompanied by slower economic growth than what we saw last year. Forecasts suggest that while we may avoid a significant recession, we are likely to see below-trend economic growth for the remainder of 2022 and into 2023.

What Do the Fed’s Action’s Mean to Farm Credit East Borrowers?

Farm Credit East borrowers who have variable rate loans tied to Farm Credit East’s Base Rate have seen the impact of the Fed rate hikes, so some may be wondering about the connection between the two. While Farm Credit East does not access the Fed relative to overnight lending or borrowing activity, the Federal Funds rate nonetheless sets the market for all issuers of short-term bonds.

The source of funds that Farm Credit East (and all Farm Credit System institutions) lends are bonds issued by the Farm Credit Funding Corporation. These bonds’ maturities range from very short-term to long-term, and the bonds that fund variable rate loans are generally short-term in nature. When the Fed raises the Federal Funds target rate, it causes the interest rate on all short-term bonds being issued to increase in order to attract investors.

In essence, Farm Credit East’s borrowing cost of the funds it lends out to customers moves nearly in lock step with the Fed’s actions. In order to maintain the Association’s long-term financial goals of stable earnings, building capital and paying patronage dividends, Farm Credit East adjusts the interest rate on its variable rate loan products by similar amounts as the Fed. Some Farm Credit East customers have loans tied to published index rates such as the Prime Rate used by most commercial banks. Farm Credit East’s managed rates have increased by the same amount as the Prime Rate based upon recent Fed actions.

2022 Farm Credit East Customer Appreciation Meetings

Farm Credit East has continued to be successful and that is thanks to the strength and adaptability of their members. To celebrate their loyal customers, they’ll be holding customer appreciation events across their territory in 2022.

New this year, they will be holding a few regional meetings, as well as some of their traditional one-office events. Customers are welcome to attend any event, including events outside their local area.

SUMMER EVENTS

Find information below for those offices hosting a summer event. Your whole family is invited to attend any of these family friendly activities. Please just indicate how many will be in attendance when registering. 

• Sunday, August 14, 1:00 p.m. (Game at 2:00 p.m.) - Dutchess Stadium; Hudson Valley Renegades game (Hosted by Middletown and Claverack) 
  • Visit with fellow Farm Credit East customers and staff and catch exciting minor league baseball action when the Class A affiliate of the New York Yankees takes on the Aberdeen IronBirds. Food and drinks will be provided 1 p.m. – 3 p.m.
• Friday, September 9, 11 a.m. - 2 p.m. - Farm Credit East's Burrville Office
  •  Tour the newly renovated office while visiting with other members, enjoy a chicken BBQ meal and they will award some exciting raffle and door prizes. For every customer that attends, they will be donating to the Food Bank of Central NY on your behalf.

  • * The previously scheduled event for the Bridgeton and Flemington, NJ offices on August 16 has been canceled and will be rescheduled at a later date, to be determined.

FALL MEETINGS*

Fall meetings will include an update on your cooperative in addition to exciting raffle prizes. 

• Wednesday, October 26 - Dinner Meeting - (Hosted by Enfield, CT)
• Thursday, October 27, Lunch Meeting - (Hosted by Dayville, CT)
• Thursday, October 27, Dinner Meeting - (Hosted by Middleboro, MA)
• Wednesday, November 2 - Dinner Meeting - (Hosted by Presque Isle, ME)
• Thursday, November 3 - Dinner Meeting - (Hosted by Auburn, ME)
• Friday, November 4 - Lunch Meeting - (Hosted by Bedford, NH)
• Monday, November 14 - Lunch Meeting - (Hosted by Riverhead, NY)
• TBD - Meeting (Hosted by Bridgeton & Flemington, NJ)

*Some meetings have tentative times and locations. More information will be included as it becomes available.*

REGIONAL EVENTS

To provide members across the region with valuable business insights and networking opportunities, Farm Credit East looks forward to hosting two in-person regional events this fall as well as a virtual meeting for those interested in attending. These meetings will bring you a cooperative update from CEO Mike Reynolds and Board Chair Laurie Griffen. You’ll also hear from consumer trends expert Kelly McDonald for an entertaining discussion on the title topic from her bestselling book, How to Work with and Lead People Not Like You.

Kelly is an entertaining and highly sought after speaker considered one of the nation’s top experts in marketing, customer service and consumer trends, and has been featured on CNBC, in Forbes, Bloomberg BusinessWeek, Fast Company, on CNNMoney.com and more. In addition to How to Work with and Lead People Not Like You, she's authored How to Market to People Not Like You and Crafting the Customer Experience for People Not Like You. All three of these bestselling books were among the top 10 business books in the year they were published. 

Find information for each of the two in-person regional events and virtual meeting below. Customers are welcome to attend any session that is convenient for them. These meetings are in addition to customer events that your local office may be hosting. Click the button below to save your seat for a regional meeting. A registration link for the virtual session will be available at a later date. 

• Burlington, VT Regional Event
  • Tuesday, November 1, 10:30 a.m.
  • Doubletree by Hilton 870 Williston Rd., S. Burlington, VT 05403 
  • Hosted by Derby, Middlebury, St. Albans, White River Junction
• Virtual Meeting
  • Monday, November 7
  • A registration link for the virtual meeting will be provided in the near future.
• Syracuse, NY Regional Event 
  • Wednesday, November 16, 10:30 a.m. - 1:30 p.m.
  • Doubletree by Hilton, 6301 SR 298, E. Syracuse, NY, 13057  
  • Hosted by Burrville, Cooperstown, Cortland, Geneva

We hope you'll join us for Farm Credit East’s customer appreciation events to visit with staff, leadership and fellow Farm Credit East members.

NYSERDA Hydrogen Initiative

The New York Energy Research & Development Authority (NYSERDA) is looking to connect with manufacturers that consume large amounts of fossil fuels and biofuels in their manufacturing processes. Organizations that meet these requirements may be interested in supporting the state’s effort to seek funding (in conjunction with New Jersey, Massachusetts and Connecticut) to develop a regional hydrogen hub, with funding coming from the federal Infrastructure Law signed in November 2021.  Under this program, the US Department of Energy will be awarding up to $8 billion to support the development of regional hydrogen infrastructures. Even without this funding NYSERDA will pursue hydrogen as an alternative to help decarbonize the industrial sector.

As part of its application process, NYSERDA is looking to identify industrial companies that would either lend general support to the effort, or make commitments for formal program participation (including, initially, provision of fuel consumption data).  As shown in the attached, NYSERDA has nearly sixty business and academic partners on this effort, but few so far in the industrial sector, and they have approached The Business Council, ESFPA and other trade associations to help them do additional outreach.

We have scheduled an informational briefing by NYSERDA staff for Thursday, August 18, from 9:30 to11 a.m. (virtual), and welcome your participation (absolutely no commitment is expected or required at this time).  

If you or someone from your company is interested in participating, use the link below to access the briefing:

Log-A-Load for Kids Fund Drive Begins at Boonville

For 25 years, New York State Log-A-Load for Kids has participated in a nationwide program to support Children’s Miracle Network Hospitals, and the NYS Committee (i.e. the Mowrey Family) is once again reaching out to the forestry community for support.   

One way to participate is at the 2022 NYS Woodsmen’s Field Days. There will be many events going on, including fund drives and raffles. The Committee is looking for donations of goods, services, or loads of firewood to be raffled off at the Woodsmen’s Field Days as well as time at any of the booths. 

Any and all items donated are greatly appreciated and help raise thousands of dollars for children in need. Promotional items with company logos are popular and make excellent game prizes. Monetary donations will be used either for the purchase of supplies or will go directly to your local CMN Hospital. 

In celebration of New York Log-A-Load for Kids’ 25th anniversary, we are also asking our donors to please consider an additional 25% contribution. We’d like to make this a big year! 

Every donation makes a difference. If you are interested in donating or volunteering, please contact Gabriella Ferrera at gabriella@esfpa.org or Eileen Mowrey at emowrey12@gmail.com .