Twisted Yield Curve
Recently I was on the same program as Dr. Ed Seifried, a leading macroeconomist. One of the producers asked Dr. Seifried, “Why are short-term interest rates increasing, yet long term rates appear to be declining?” Let’s explore his response and examine how it may influence farmers’ and ranchers’ decision making.
First, short term rates, i.e. the Federal Funds rate, has increased from the 2003 level of one percent to two and one-half percent currently. The 30-year mortgage rate has declined from 6% in June to 5.39% currently. Why don’t they both increase or decrease at the same rate?
First, the U.S. trade deficit has doubled since 2001 from $350 billion to $617 billion. The increase in the trade deficit, combined with the huge federal deficit of nearly $500 billion, has caused our dollars to be stockpiled in China and other countries we maintain a deficit with.
This has resulted in these countries financing our spending habits, debts and deficits, with their trade surpluses, shifting short term rates up, but actually decreasing U.S. long term interest rates. Any change in these countries’ appetite to continue to do this could result in a sharp increase in long-term rates.
Dr. Seifried indicated that if long-term rates hit the 7% level, this is when the real estate bubble or balloon starts to let out some air, first in urban and suburban real estate, then in farm and rural areas. I guess only time will tell!
Dr. Seifried did predict the 2000 recession at the ABA’s Ag Bankers’ Conference. He also indicated that the DOW would be 10,000 by year 2000 in 1989. I witnessed that prediction.
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Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.
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