Rate cut’s impact on economy, agriculture still to emerge

The effects of the Federal Reserve’s first rate cut in four years on consumer spending and agriculture will take weeks to reveal themselves, said Ryan Loy, extension economist for the University of Arkansas System Division of Agriculture.

Confident that the economy will achieve both a healthy unemployment rate and 2 percent inflation rate, the Federal Reserve cut its target rate by 0.5 percent to 4.75 percent on Sept. 18. It was the first reduction in four years.

“Time will tell for the implications of this cut,” Loy said.

Agriculture effects

Loy said relief may not come instantly for agriculture. Big yields, large stocks and a slowing of grain barge traffic because of lower Mississippi River levels are driving commodity prices downward, putting farmers in a tough spot.

“This is just the first cut of the year and there are likely more on the way,” Loy said. “Producers now have avenues to better manage debt through refinancing or debt consolidation with more favorable loan terms and interest rates.

“The benefits will be more apparent to producers should the Federal Open Market Committee choose to cut 0.25 percent at each meeting through 2024,” Loy said.

Powell emphasized the committee is not on a “preset course” and will continue to make decisions meeting by meeting.

Consumer spending Energetic consumer spending since the COVID pandemic hasn’t allowed the economy to cool down. In March, the National Retail Federation forecast a rise in retail sales between 2.5-3.5 percent in 2024.

“It’s tough to say if consumers will react instantly to this one cut alone,” Loy said. “I suspect some will and with the high spending we’ve seen over the last two holiday seasons, this cut has the potential to motivate more spending.”

Behind the decision The Fed’s decision, chair Jerome Powell said, reflects “growing confidence” that with an “appropriate recalibration” of its policy stance, “strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2 percent.” Powell said the economy was strong overall and noted “inflation has eased substantially from a peak of 7 percent to an estimated 2.2 percent as of August.” Part of that confidence comes from an unemployment rate that has been holding steady at around 4 percent, he added.

Stab ilizing the economy

Loy said the move to cut the interest rates is meant to have a stabilizing effect on the economy.

An increase in unemployment can signal to the Fed that the labor market is weakening, “a potential consequence of maintaining persistently high interest rates,” he said. “Without a rate reduction, the risk of slowing the economy too sharply could lead to higher unemployment, without achieving the desired stabilization of prices. The rate cut is intended to mitigate this risk.”

A statement released by the committee had a more cautious tone: “The economic outlook is uncertain, and the committee is attentive to the risks to both sides of its dual mandate.”

The decision to go with the 0.5 percent cut wasn’t unanimous. Member Michelle Bowman sought a less aggressive move, preferring to cut rates by .25 percent.

“Some believe this cut to be too aggressive, too soon, and could potentially reignite inflation the Fed has been fighting since 2022,” Loy said.

The Fed instituted 11 interest rate hikes — seven in 2022 and four in 2023. The Fed declined to change rates when it met in June, the seventh consecutive meeting at which rates remained unchanged.