Episode 95 - Fed Funds Update and Outlook

The Federal Reserve Open Market Committee's June 2026 meeting ended in a federal funds rate hold, but the odds of a rate hike by September have jumped to nearly 70%. Hunter Biram and Ryan Loy unpack what's driving the shift, from lingering energy-price inflation to the disappearing benefit of last year's rate cuts on farm budgets. If the Fed does move, it's one more squeeze on operating costs at a time when farm profitability is already stretched thin. 

Transcript

Dr. Hunter Biram 0:00

The Fed held rates steady in June. Energy prices are the wild card, and a rate cut wouldn't necessarily help farmers as much as it might sound. That so much more on this episode of Morning Coffee and Ag Markets. Well, I'm your host today, Dr. Hunter Biram, and with me. I've got my good friend and colleague, Dr. Ryan Loy. Ryan, how are you?

Dr. Ryan Loy 0:17

Doing great, Hunter. How about yourself?

Dr. Hunter Biram 0:19

You know, doing pretty good. For those listening, Ryan and I are in Idaho Falls for an extension risk management education meeting, and it is just beautiful here.

Dr. Ryan Loy 0:29

It's gorgeous. I've never been to Idaho before, and this was a really cool place. I know we went and checked out the the falls that they have in town. You know, it's like right in the middle of town. Waterfall and like some rapids. Really beautiful place.

Dr. Hunter Biram 0:40

You know, when I learned that we were going to be in Idaho Falls, I did not know that there were literal Idaho Falls.

Dr. Ryan Loy 0:46

Yeah, me neither.

Dr. Hunter Biram 0:47

And then we get to the hotel and my taxi driver, well, he said, You're at the Hilton Garden Inn. Uh the falls are right behind your hotel. I was like, what are you talking about? He's like, Oh, if you take this little bridge out there, he'll take you right to the falls. There's a waterfall out there. I was like, Oh, no way. And sure enough, there is one. And don't think of Niagara Falls, people, but it's still very impressive and very beautiful to be right smack dab in the middle of town.

Dr. Ryan Loy 1:07

Really. And it's just gorgeous. You can walk where we like a couple hundred yards outside the back of our hotel and everything gorgeous. Super close. Very cool agriculture up here, too. A lot of potatoes, a lot of wheat, um, barley, I think is what we learned yesterday as well. So very cool stuff. But today we're gonna follow up on the June federal rate decision, federal funds rate decision. And so, really, it was it was a big meeting because it was the first meeting that was led by the new Fed chair, Kevin Warsh. And that would, you know, Chairman Powell's out at this point now, but he still remains on the board. And so just kind of wanted to give some updates there and some outlook into the future as we go forward. So at the June 2026 meeting, the Federal Reserve Open Market Committee or FOMC voted to hold the federal funds rate at 3.5 to 3.75%. This has been unchanged since a quarter point cut in December of 2025. So we haven't made a move on the interest rates since last December. So this, you know, rate applies to the interbank lending rate. It's not the direct consumer rate, but you can think about the Fed funds rate that establishes the prime rate, which the prime rate is kind of at floor in terms of interest rates on the uh commercial level.

Dr. Hunter Biram 2:19

So, Ryan, if I can stop you, just let's just do a quick 101 on just money and banking. I mean, whenever we think about money, I mean, I always just think about I've got 20 bucks, I'm just gonna use it and buy something with it. But when we're talking about banking, I mean, banking is a business. That's right. So can you kind of just break down real briefly the business of banking?

Dr. Ryan Loy 2:36

Absolutely. So, you know, interest is the cost to borrow money, and interest rate is the percentage of that of that money that you're borrowing that you're going to have to pay back in that interest expense. Again, the cost of borrowing money, right? Banks are a business, they have to make money. So when they borrow from each other at the Fed funds rate, they have to loan out dollars at a rate at least higher than that. And that typically is the prime rate or higher. Prime rate's about 3% above the federal funds rate historically, and usually is in that range. And so they build in that to have some profit margin. And then depending on your relationship with the lender, how long you've been borrowing from them, you know, what kind of assets you may have, what you're borrowing for, is gonna really determine that individual interest rate. But when we're specifically talking about short-term, you know, loans, the federal funds rate and the prime rate are gonna influence those interest rates, which all just represent cost of borrowing money. And they're all based on the federal funds rate to ensure some profit margin to continue operations as a bank.

Dr. Hunter Biram 3:33

So if we were to stack these up, the federal funds rate is the bare rate.

Dr. Ryan Loy 3:36

Is the bare, and it's called the benchmark, right? So it's it's a benchmark rate, right? They're gonna benchmark their the prime rate off the federal funds rate, and they're gonna use the prime rate as kind of their baseline in terms of what they're gonna loan out to a customer.

Dr. Hunter Biram 3:48

So there's that, the benchmark rate, and then there's the prime, which is a function of the benchmark. Yep. And does it go any level above prime?

Dr. Ryan Loy 3:55

It certainly can. It again, it's all gonna come down to you as the individual at that point and what you're borrowing for, how long you're borrowing it for, because longer term notes, the Fed funds rate does influence it, but it's not gonna be as heavily influenced as shorter term notes. So, you know, things like the 10 or 30 year treasury will come into longer term notes as well in terms of what that interest rate would be. So it definitely can be higher than the prime rate. Like I would say, you know, you and I is you if we a person who is our age is most likely not gonna be able to get just the prime rate, right? They're gonna have a little bit higher because of, you know, I say risk, but again, you're younger, we're younger in district. Right, exactly.

Dr. Hunter Biram 4:31

No proof that like he can repay some repayment capacity, and so we're at greater risk.

Dr. Ryan Loy 4:35

That's right. So they're gonna give you a higher interest rate because they want to make sure that the cost of borrowing again they get more money back in case of that risky investment on their part.

Dr. Hunter Biram 4:44

So you're saying this is risk management on the part of the bank, maybe?

Dr. Ryan Loy 4:47

It's pretty crazy, isn't it? But it really is in terms of why these things are used and how they're how they're kind of you know lowed out.

Dr. Hunter Biram 4:53

And so today, are you talking about the Fed funds rate? Is that the focus?

Dr. Ryan Loy 4:57

That is gonna be the focus today, talking about the Fed funds rate. Again, just they left it unchanged, which they haven't changed it since December of 2025. If you look back the last two years, I think almost three years at this point, you know, the Fed did not move on interest rates until the last three months of the year. So we still have, you know, again, if you look at that pattern, the expectation would be that would happen later in the year. But this year is a little bit out of the ordinary because the, you know, decision to hold the rate again in June really reflects the continued caution, mixed inflation signals. But again, if you're looking at those patterns, we, you know, they may follow the pattern of raising it at the end of the year. The FOMEC still will meet at the end of July, again in September, October, and then December. And so as it stands now, a hold, a rate hold is pretty much expected at the July meeting, which will happen at the end of this month, unless a major geopolitical disruption continues. And so I'm gonna stop there and back up just a little bit. A big thing right now is gonna be these energy-related inflationary pressures we have right now. And what the Fed doesn't want to do is make decisions on raising the rate or even cutting the rate based on short-lasting inflation. If this inflation is gonna persist and go into other areas of the economy and they see that data for several months here, you know, month over month over month, they can have a better informed decision. So the reason for the hold now, even given all of the inflationary stuff you see at the gas pump and energy are on the news, is there's not that much data yet to tell them, hey, if if this gets fixed, is this gonna eventually work its way out of the economy or is this gonna be here to stay? And we have to adjust to ensure that we don't have rampant inflation across the economy. Right now, it's really just kind of in the energy sector. And of course, the energy sector spills out into other parts of the economy, and that's what they're trying to figure out. To what degree is it spilling out? And is this a course for them to have action on it? Or is it, hey, let's wait this out because this is not going to be long-lasted because it's, you know, supply driven, right? In terms of energy, oil, straight of four moves, everything that's going on, which we've talked about. But again, Kevin Warsh, he's the new Fed chair. We've talked about Chairman Powell on this show several times before. He's out, still on the board, so he still has a vote.

Dr. Hunter Biram 7:09

And he's out because his term is his term is out.

Dr. Ryan Loy 7:11

Yep, yep. His term was over. And so uh President Trump appointed Kevin Warsh, and he was appointed in May, and this was his first meeting. And so he reaffirmed a lot of what Chairman Powell's focus was, which was good to see. I'm you know, committing to a 2%, you know, long run inflation target, which is obviously something they've struggled to hit as of late in the last couple of years. But really important for listeners, you know, when you're thinking about this and the changes at the Fed and what that could mean, you know, the Fed chair can try to get the board to vote in the favor of what they would want, but it's a majority rules. And so the Fed chair cannot just unanimously make a decision on the rate, it has to be voted on by the board. So again, you know, that kind of keeps checks and balances in there a little bit more and makes sure that, you know, politics don't come into play with those rate decisions, even though they do to a certain degree.

Dr. Hunter Biram 8:01

And and to that point, you know, I I think it's encouraging. I don't want to pass by this, that Warsh is basically maintaining Powell's policy. Not just because Powell said, but it's like there's some consistency in the principles that drive the policy.

Dr. Ryan Loy 8:13

That's right. That's right.

Dr. Hunter Biram 8:14

And to me, that is just so encouraging.

Dr. Ryan Loy 8:15

Oh, it is. It definitely is, you know, because especially when nobody really knew what German Warsh was going to be like, what his stance on inflation was gonna be. But so far it seems like they're committed to have that standardized procedure that they're gonna follow, which again, you know, in terms of markets, right? Like, you know, the markets want that certainty, right? That's exactly right.

Dr. Hunter Biram 8:34

Well, and you know, I do want to talk briefly about what's happened in energy and in the fuel markets. I mean, obviously you and I have felt that at the pump, and everybody in in in the world really has has felt that. And so when we look at this, no doubt there was an impact. A huge increase in price. Absolutely. I mean, what was this in March, whenever started and so March, April, May, June, into July. So I mean, more than a quarter. Yep. More than a quarter long. But now I guess my question is, what do you think? Do you think that that is that this is just a temporary hit on prices, or do you think that this is something that's gonna be something that will feel, I guess, in the next six months?

Dr. Ryan Loy 9:12

Absolutely. So a couple of things on that. One, you know, the Fed's data has lagged a little bit, right? So while we've gone through four months, they may only have three months of data at the time. In terms of what I think and what I see, you know, us economists know very well the rocket and feathers effect, right? You know, prices are gonna go up like a rocket, fall like a feather. And I think that, you know, in the best case scenario, we're going to see that here in this case, right? You know, we saw this with the Russian-Ukraine war with chemical inputs. And what we saw there was again, those prices reacted, but it took a long time for them to come down and stabilize. Really a year. Exactly. So, you know, when you think about what could happen here, let's say at the time of this recording, they have now called off the ceasefire. So it's gonna be very interesting to see how that goes. But the point I'm trying to make is that even if today they fixed everything and the Street of Four Moose was open, gas prices are not going to fall instantly. They're gonna take a while. And the question becomes is how long does the Fed believe that will stick around for if things are fixed? To that point, one thing that's very interesting that we have not seen in the last two years, and it's really because of this inflationary pressure right now, the board, the FOMC, is really kind of saying, if this doesn't get fixed in the near term, we're going to have to react, right? Because then it becomes a long-term problem. And as it stands right now, something we have not seen in the last two years since they started cutting rates is actually a very good chance of a rate hike. So we talked about July. It's pretty certain that it's gonna maintain steady in July. But when you start looking at September and through the rest of the year, currently it's about a 69% chance that they're going to raise the rate to either by either 25 basis points or 50 basis points. Wow. And that's either a quarter percent or half a percent. Again, and only a 30% chance that they'll maintain the rates, not even a percent chance that they'll lower the rates. So it's either going to be held steady, but there's a greater chance right now that it's gonna go up. Again, when you look at October as well, same exact situation, but this time there's a percent chance that they even made you a 75 basis point or a 0.75 percent increase at that time.

Dr. Hunter Biram 11:11

So would that be a cumulative increase relative to now, or would that be on top of the September meeting change?

Dr. Ryan Loy 11:18

That would be a cumulative increase up to now.

Dr. Hunter Biram 11:20

Okay, yep. So maybe 15 September, 75 in October. That's right, that's right, exactly. Cumulative 25 points more than September.

Dr. Ryan Loy 11:28

Exactly right. Got it. And so that's something to really pay attention to. In terms of, you know, again, we want to know why this matters for agriculture. It's gonna matter big time for your operating notes. You know, last year and the year before last, we were looking at rate cuts that could have helped with some of that, you know, interest rates per acre, which has become a significant line item on a budget. In, you know, what we've seen with this year is that even with that interest rate decline and it freeing up a little bit of that, the cost of inputs has kind of overtaken that. And really the the the part to watch out for for farming and in agriculture is to say, well, if they're gonna also raise the rate and the my inputs are not gonna go down, we're gonna continue into that price squeeze spiral that we've been in with really no sign of relief. And so, you know, in terms of what you can do, you know, talk to your lender early, get plans early, know your profitability, know your budget as well as you can. And in cases where it's available, trim the budget. Again, not to the detriment of your own production, but where it can be, trim the budget to try to help alleviate some of these issues that could occur near the end of this year and definitely before next loan season.

Dr. Hunter Biram 12:36

Now, Ryan, do you know if a farmer could go to an ag lender today or next week or in sometime in August before the September meeting? Because you know, we're talking about the increase could happen in September. Could they go to a lender now and possibly lock in an operating note for the 2027 crop year?

Dr. Ryan Loy 12:52

That's a good question. I've gotten this question before. And I think the answer, okay, so first of all, I I I really don't know either way because I think it depends on the lender and and how their risk tolerance. Their risk tolerance. But also when you think about, let's say when you think about getting a mortgage, right? When you start going through the process, they're gonna you're gonna lock it at a rate at that time that's gonna be good for, you know, if it takes you three months to close, it's still gonna be good at that rate. Does it work for a short-term loan like that? I don't know. And I think that's gonna be up to the lender. You know, again, it when I say it's up to the lender, I bet it would be also up to the borrower as well in terms of the relationship they have. Are they are they um are they guaranteed to always repay if they never have problems, never late payments? You know, that may change it. But for a short-term loan, I really don't know if that's something they could that can be done.

Dr. Hunter Biram 13:37

Yeah, I mean, I'm I'm and I'm really just curious. And my gut would tell me I'm not entirely sure either because loan renewals took so long this year. That's right. Just given where the state of the egg economy is, and people deciding, am I gonna make any money this year or am I gonna be maintaining with a break-even and just seeing where the markets are at? And so, but I didn't know. Maybe there are some people that are in better financial position, and maybe they're gonna make that call and say, hey, there's a 60% chance that the rate's gonna go up this fall. Yeah, and it could be up to you know three quarters of a point. So I think I'd like to lock in. And I mean, if you just did like a rough back of the envelope calculation, you know, off the top of your head, like per acre, like what that increase might look like. Are we talking $10 an acre, $20 an acre?

Dr. Ryan Loy 14:18

Probably somewhere around there. When I ran the numbers earlier this year and kind of compared it to last year and then in another newsletter that we had ran earlier, right? It was about that. It's about twenty ten to twenty-five dollars, depending on the crop and what you're borrowing. Yeah, absolutely. So again, significant when you start it really is. So, I mean, even just putting it over a thousand acres, that's right, five thousand dollars. That's right. That's a lot of money and just interest expense that maybe could have been avoided, right? Sure. I would also say, in terms of locking in an interest rate early and and alone, you know, I would be curious, and you know, any farmers that are listening, if you know better than us in this situation, please reach out because we'd like to know. I would want to know, you know, can you get a crop plan together that early while also going through hardest as well? Or get the crops to harvest. That's right. And get that together for the lender that early to do that and sorry and that I don't know. Maybe they can. Yeah. Um, so anyway, if you're listening to this and you have and you're rolling your eyes at our conversation right now, please reach out and uh let us know.

Dr. Hunter Biram 15:13

Well, I will tell you, there was one time before you started with us, Ryan. I remember this was in the fall of uh 2022. I had a farmer calling me asking about that this would have been September, I believe, in 2022. He was asking me, he's like, What should I be planting in 2024?

Dr. Ryan Loy 15:28

Ooh.

Dr. Hunter Biram 15:29

Cause he's like, I think I already know what I'm gonna do in 23. He's like, now I want to start thinking about 24.

Dr. Ryan Loy 15:34

Well, he was thinking really ahead.

Dr. Hunter Biram 15:36

Uh-huh. And I wasn't ready. I really wasn't ready for that conversation. I felt bad because I really wasn't ready. But I think there are some that might not be the vast majority, but I think there are some that are thinking, you know, that that far ahead.

Dr. Ryan Loy 15:47

That's far ahead. And I wouldn't blame him, especially in a time like this of just it seems that every time we get some certainty on markets or certainty in in what will occur, we get a lot of more uncertainty introduced. And, you know, I think that this year has has been that to a T.

Dr. Hunter Biram 16:01

Well, Ryan, thanks for your time and safe travels to Arkansas.

Dr. Ryan Loy 16:04

And you too.

Dr. Hunter Biram 16:05

It was great to talk to you and great to uh hang out with you this week. Yeah, man. Same to you. All right, I'll stay tuned for the market report. Thanks.

Evan Ware 16:11

Back with your market report as of July 9th, 2026. Corn September futures are four dollars and thirty-two cents per bushel. That's up one percent from a month ago and up eight percent from a year ago. Corn December futures are four dollars and fifty-two cents per bushel. That's up two percent from a month ago and up nine percent from a year ago. Rice September futures are thirteen dollars and ninety-four cents per hundred weight. That's up nine percent from a month ago and up six percent from a year ago. Rice November futures are fourteen dollars and thirty cents per hundred weight. That's up nine percent from a month ago, and up seven percent from a year ago. Soybeans November futures are eleven dollars and eighty-two cents per bushel. That's up four percent from a month ago, and up seventeen percent from a year ago. Soybeans March 27 futures are eleven dollars and ninety-six cents per bushel. That's up four percent from a month ago and up seventeen percent from a year ago. Cotton December futures are eighty point six three cents per pound. That's up seven percent from a month ago, and up nineteen percent from a year ago. Cotton March 27 futures are 81.97 cents per pound. That's up seven percent from a month ago, and up nineteen percent from a year ago. Wheat July 27 futures are six dollars and fifty-seven cents per bushel. That's up twelve percent from a month ago, and up twenty-one percent from a year ago. The US weekly average for peanuts is four hundred and twenty-four dollars per ton. That's down ten percent from a month ago and down twenty percent from a year ago. Moving on to our fertilizer prices, urea is currently five hundred and sixty-five dollars per ton. A month ago it was six hundred and sixty-nine dollars per ton. Three months ago it was eight hundred and twenty-nine dollars per ton, and a year ago it was five hundred and sixty-eight dollars per ton. Ammonium nitrate is currently about five hundred and seventy dollars per ton. A month ago was five hundred and eighty dollars a ton. Three months ago it was five hundred and seventy-nine dollars per ton. And a year ago was four hundred and fifty dollars per ton. Ammonium sulfate is currently five hundred and seven dollars per ton. A month ago was five hundred and fifty-three dollars per ton. Three months ago was five hundred and eighteen dollars per ton. And a year ago is five hundred and thirty-two dollars per ton. DAP is currently about nine hundred and twenty-three dollars per ton. A month ago was nine hundred and twenty-four dollars per ton. Three months ago is eight hundred and twenty-seven dollars per ton. And a year ago is eight hundred and five dollars per ton. Triple super phosphate is currently about eight hundred and five dollars per ton. A month ago it was eight hundred and forty-five dollars per ton. Three months ago it was seven hundred and twenty-five dollars per ton. And a year ago it was six hundred and fifty-three dollars per ton. Pot mesh is currently about four hundred and fifty-seven dollars per ton. A month ago it was four hundred and seventy-five dollars per ton. Three months ago it was four hundred and forty dollars per ton. And a year ago it was four hundred and thirty dollars per ton. Now for our fuel prices. Arkansas Highway Diesel is currently about four dollars and thirty-two cents per gallon. A month ago it was four dollars and eighty-five cents per gallon. And a year ago it was three dollars and thirty-eight cents per gallon. Arkansas Farm Diesel is currently about three dollars and seventy-six cents per gallon. A month ago it was three dollars and seventy-four cents per gallon. And a year ago it was two dollars and sixty one cents per gallon. The Mississippi River at Memphis current reading is nine point two four feet. A year ago was twelve point one five feet. Thanks to Scott Stiles for putting together our market report each week. And thanks for tuning in to another episode of Morning Coffee and Ag Markets. We hope that you have a great week.

Dr. Hunter Biram 19:29

If you would like to learn more about the Fryar Price Risk Management Center of Excellence, we encourage you to go to Fryar F-R-Y-A-R-Risk, R-I-S-K-Center dot u a da dot edu. If you want to check out the newsletter that is associated with this podcast, we encourage you to visit the website and check out podcast newsletters. When you go to podcast newsletters, you should be able to see the most recent newsletters that we published. And within each one of those newsletters, you should be able to click on a link to subscribe if you haven't subscribed already. Thank you for tuning in and we'll catch you next time. Bye bye, now.