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The last several years we've seen historically low interest rates. Eventually these rates will rise and that may be sooner rather than later. This is the first in a three part series about managing the risk of rising interest rates.

Borrowers Can Take Immediate Steps to Fend Off Risks from Rising Rates


Since the Great Recession of 2008-2009, farmers, ranchers, agribusinesses, rural homeowners and other borrowers have enjoyed record-low interest rates for their short- and longer-term debt. The Federal Funds (“Fed Funds”) rate, a benchmark for short-term interest rates in the U.S. economy, has effectively been zero since early 2009. However, with the economy slowly improving, the risk of higher interest rates is rising as the Federal Reserve (“the Fed”) contemplates “tightening” monetary policy. Now is the time for borrowers to understand and minimize the potential effect of rising interest rates on their operations.

 

Highlights

 

 


  • Interest Rates: Record Lows Likely to Rise. The U.S. economy has been slow to recover from the Great Recession. The Federal Open Market Committee (FOMC), the Federal Reserve committee that makes key decisions about interest rates and the growth of the U.S. money supply, has left the Fed Funds rate near zero while waiting for the overall economy and the labor and housing markets to improve. The consensus among economists and market participants is for the Fed to begin raising interest rates by the middle of 2015 or early 2016. This would follow the Fed’s decision in October 2014 to end its $3 trillion bond-buying program, which it had been using to stimulate the economy.

  • Fixed Rates: An Opportunity to Lock in Low Rates. Most producers who borrow money for operating expenses have revolving lines of credit or loans with variable interest rates. With the growing prospect that rates will rise in the next year or so, these borrowers should analyze the impact of rising interest rates on their operations and determine if a portion of their debt should be financed with prepayable fixed rate debt to reduce interest rate risk. This may involve locking in today's interest rates by converting variable rate debt into fixed rate debt, or by financing new equipment or land purchases at today’s fixed rates.

  • Cash Management: More Savings Opportunities. A revolving line of credit combined with cash management solutions may offer additional ways to save on interest payments — and even earn interest.


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Again, this is a three part series. Check back next week for parts 2 and 3.

Information in this post was provided by AgriBank. AgriBank is FCS Financial’s funding source. It is one of the largest banks within the national Farm Credit System, with more than $80 billion in total assets. Under the Farm Credit System’s cooperative structure, AgriBank is owned by 17 affiliated Farm Credit Associations. The AgriBank District covers America’s Midwest, a 15-state area from Wyoming to Ohio and Minnesota to Arkansas. More than half of the nation’s cropland is located within the AgriBank District, providing the Bank and its Association owners with exceptional expertise in production agriculture. For more information, visit www.AgriBank.com.

 

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