This cut lowers the Fed’s benchmark interest rate to a range of 4.0-4.25%. Economists are largely expecting at least one, if not two, more cuts yet this year.

President Donald Trump has been pushing for the central bank to reduce borrowing costs in order to juice economic growth, but the Fed said its decision was based on the need to support a weakening job market.

“Today was good news as operating rates for producers and dealers’ floorplan rates should decrease,” says Greg Roberg, AgDirect vice president of sales.

Roberg says while two more cuts would be nice to see, he’s leaning toward one more cut being more likely, unless inflation falls further. “I believe the Federal Reserve will continue to manage toward a soft landing with interest rates and getting inflation to 2% is their focus,” he says.

According to a Farm Equipment Insider text poll, 43.3% of respondents said they could see a 1-2% bump in their year-end sales if they saw a quarter-point reduction from the Fed this week.

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In response to economic conditions, the Federal Reserve cut interest rates by half a percentage point, bringing some relief to farmers. Lower rates reduce pressure on operating lines of credit, potentially allowing for more investment in equipment. However, despite attractive financing options from dealerships, such as low or 0% interest rates, equipment sales remain sluggish.

One reason for this hesitancy is the falling value of used machinery, which increases the cost of upgrading equipment. Farmers face larger down payments and higher financing requirements, even as interest rates drop. Leasing is an option, but modern leases often require additional obligations at the end of the term, adding complexity.

Farmers are also holding back on purchases due to uncertainty surrounding the delayed farm bill and the 2024 election. While commodity prices show some improvement, with corn prices recently rising, significant investments are likely to be delayed until market conditions stabilize, which may not occur until late 2025 or 2026. Lower interest rates are a positive step, but until broader economic and political uncertainties clear, the agricultural equipment market will remain slow.

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High interest rates have been particularly burdensome for the agriculture sector, where a large portion of assets are tied to real estate. Since 2022, the average interest rate on farmland loans has more than doubled, significantly increasing borrowing costs. This has made it harder for farmers to secure loans for operational growth, putting a strain on profitability.

Moreover, high rates have contributed to a stronger U.S. dollar, making American agricultural products more expensive for foreign buyers. This has reduced U.S. competitiveness in global markets, further hurting export volumes. A lower interest rate could help U.S. farmers regain their competitive edge in the long term.

Economists, such as Jackson Takach from Farmer Mac, believe that the rate cuts will offer immediate relief to the agriculture sector. He forecasts a total reduction of 200 basis points in short-term interest rates over the next two years, which could improve borrowing conditions for farms.

The Federal Reserve’s decision also stems from a shift in focus. After two years of prioritizing price stability, policymakers are now concentrating on their congressional mandate to maximize employment, noting that the labor market remains robust and economic growth has surpassed expectations. Fed Chair Jerome Powell emphasized that the U.S. economy is currently in a strong position, with no signs of an imminent downturn.

Although the U.S. is unlikely to return to the near-zero interest rates seen before the pandemic, the Fed remains optimistic about continued progress in reducing inflation, aiming to reach its 2% inflation target by 2026. Powell noted, “We’re not saying mission accomplished, but we’re encouraged by the progress.”

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Diane Swonk, chief economist and managing director with KPMG Economics, said the statement following the decision was more aggressive than many market participants hoped. There were only minor edits to the language regarding progress on inflation and the prospects for rate cuts.

However, she noted the line in the statement regarding risks was tweaked and made more revealing about where the Fed is headed. Instead of saying that the Fed remains “highly attentive to inflation risks,” it now says, “is attentive to the risks to both sides of its dual mandate.”

That shift reflects the Fed’s concern that it could overtighten and miss hitting its mark on a soft landing. Chairman Jay Powell had laid out his concerns earlier in the month in testimony to Congress. When pushed on the Fed’s dual mandate – to foster price stability and full employment – and the risk that it could inadvertently overtighten, Powell responded, “It’s the number one risk” that keeps him up at night.

Chairman Powell went further in his statement as he opened the press conference following the meeting. He said that if inflation fell faster or unemployment rose more than expected, the Fed would move.

The Fed is widely expected to cut rates in September. Powell was pushed on why the Fed did not cut today, given where the Fed is today. He emphasized that the Fed just needs more good evidence on inflation improving. The Fed does not want to find itself in the position that the European Central Bank now finds itself, which is a monetary policy purgatory. It cut before the Fed in June, only to be humbled by stickier service sector inflation thereafter. That has left it in an uncomfortable holding pattern, unable to commit to cutting again in September.

Powell also said that the Fed will be “data dependent, but not data point dependent” in its decisions. This is important, as financial market participants tend to react to each individual data point instead of taking the data in its totality.

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The Personal Consumer Expenditures (PCE) price index, the Fed’s preferred measure of inflation, increased by 0.3% in January, bringing the annual rate to 2.4%, down from 2.6% in December. This result, in line with predictions, kept the possibility of a mid-year rate cut on the table.

Traders adjusted their expectations, with Fed funds futures now indicating a 74% likelihood of a rate cut in June, up from 57% before the report. The market now anticipates an 82 basis points reduction for the year, slightly higher than the 78 basis points implied before the data release.

While Fed officials have resisted the idea of imminent rate cuts, emphasizing the need for sustained evidence of inflation cooling, market sentiment remains cautiously optimistic about a potential June rate cut.

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“Lending has softened alongside nearly two years of increases in farm loan interest rates that have put considerable upward pressure on financing costs,” said the Kansas City Fed.

“The farm economy moderated in recent months as profit margins thinned alongside commodity prices and elevated expenses,” said the Kansas City Fed in a summary of a quarterly survey of ag bankers nationwide. “Credit needs have increased for many borrowers alongside high input costs, but strong liquidity built up in recent years has allowed many producers to supplement additional loan advances.”

The USDA estimates that net farm income, a broad measure of profitability, will total $141.3 billion this year, a plunge of 22 percent from the record $183 billion of 2022. Nonetheless, income this year would be still the second highest ever and $40 billion above its 10-year average. Receipts from crop and livestock sales would be down $23 billion, while expenses would be up $29 billion. The debt-to-asset ratio, an indicator of solvency, would decline slightly.

The average interest rate on all types of farm loans, after rising for nearly two years, was the highest since 2007, at 8.34 percent, said the Kansas City Fed. “Considerably higher financing costs have likely prompted borrowers with ample liquidity to limit debt usage, but any softening in farm finances could reduce cash reserves and put upward pressure on lending demand.”

As a result of the decline in farm lending, the volume of operating loans exceeding $1 million was half of its year-ago volume and the volume of smaller-sized loans was down 15 percent, said the Ag Finance Update. The change favored smaller banks, which typically handle smaller loans. They saw a 25 percent increase in non-real estate lending, while large banks saw a decline. The average operating loan this summer was nearly $59,000.

“The average duration of new farm real estate loans has increased gradually over the past year and was more than five years longer than the average loan from 2010 to 2020,” wrote Kansas City Fed economists Nate Kauffman and Ty Kreitman. Maturity dates for operating, livestock, and equipment loans held steady.

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What’s going on: “We are attentive to recent data showing the resilience of economic growth and demand for labor,” Powell said during a talk at the Economic Club in New York. “Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.”

• The Fed’s aim in raising rates has been to reduce inflation to 2%.
• Since it began raising rates in March 2022, however, unemployment has stayed largely steady, and “economic growth has generally remained above the 1.8% annual growth rate Fed officials see as the economy’s underlying potential.”

A delicate balance: While Powell said there is evidence of a cooling labor market, the Fed must account for new “uncertainties and risks”—including the Hamas–Israel war—as it seeks “to balance the threat allowing inflation to rekindle against the threat of leaning on the economy more than is necessary.”

• Data since the central bank’s last meeting, in September, have shown unexpected U.S. job growth and surprisingly strong retail sales, “offering inconsistent signals about whether inflation is on track to return to the Fed’s 2% target in a timely manner.”

Hike likely: Most Reuters-polled economists expect the Fed to raise interest rates at its next meeting on Oct. 31–Nov. 1.  

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U.S. inflation eased in December for the sixth straight month following a mid-2022 peak as the Federal Reserve aggressively raised interest rates and the economy showed signs of cooling.

The consumer-price index, a measurement of what consumers pay for goods and services,Ěýrose 6.5% last monthĚýfrom a year earlier, down fromĚýĚýand well below a 9.1% peak in June.

Core CPI, which excludes volatile energy and food prices, climbed 5.7% in December from a year earlier, easing from a 6% gain in November. Many economists seeĚýincreases in core CPIĚýas a better signal of future inflation than the overall CPI. Core prices increased at a 3.1% annualized rate in the three months ended in December, the slowest pace in more than a year and down from 7.9% in June.

The figures added to signs thatinflation is turning a cornerĚýfollowing last year’s surge. They also likelyĚýkeep the Fed on trackĚýto reduce the size of interest-rate increases to a quarter-percentage-point at their meeting that concludes on Feb. 1, down from a half-percentage point increase in December.

U.S.Ěýstocks climbedĚýThursday and investors bought U.S. Treasurys, lifting bond prices and weighing on yields. The S&P 500 added 0.3%, while theĚýDow Jones Industrial AverageĚýgained 0.6%, or 217 points. The technology-heavy Nasdaq Composite also rose 0.6%.

Core services and goods prices, change from a year earlierSource: Labor DepartmentNote: Core CPI refers to consumer-price index less food and energy. Core services refers to services less energy services. Core​goods excludes food and energy items.

Easing inflation follows several signs that U.S. economic activity cooled in late 2022. U.S. imports and exports fell in November from October, whileĚýand home sales all declined. Job and wage growthslowed in December, though the labor market remained tight withĚýhistorically low claims for unemployment insuranceĚýat the start of the year.

Goods prices, a key driver of inflation over the past year and a half, fell for the third straight month in December as prices fell for products such as autos, computers and sporting goods.

Improving supply chains and reduced demand have relieved price pressures on goods, but services prices continued to climb in part because of wage gains in a tight labor market. 

Some economists worry that still-high wage growth could keep consumers flush with cash and companies eager to raise prices to compensate, holding inflation above the Fed’s 2% target.

“Taming services inflation will be the Fed’s biggest challenge this year,” said Ryan Sweet, chief U.S. economist at Oxford Economics. 

After two straight years of record-setting payroll growth following the pandemic-related disruptions, the labor market is starting to show signs of stress. That suggests 2023 could bring slower hiring or outright job declines as the overall economy slows or tips into recession.

Employers added 223,000 jobs in December, the smallest gain in two years, the Labor Department said Friday. Average hourly earnings were up 4.6% in December from the previous year, thenarrowest increase since mid-2021, and down from a March peak of 5.6%.

Other data released this week point to a slowing U.S. economy. New orders for manufactured goods fell a seasonally adjusted 1.8% in November, the Commerce Department said Friday. Business surveys showed a contraction in economic activity in December, according to the Institute for Supply Management. Manufacturing firms posted the second-straight contraction following 29 months of expansion, and services firms snapped 30 straight months of growth in December.

Despite some signs of cooling, the labor market remains exceptionally strong. The Labor Department recently reported that there were 10.5 million job openings at the end of November, unchanged from October, well more than the number of unemployed Americans seeking work.

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