During the two-plus years I have been writing this column, I have stated that given the economic circumstances, interest rates would climb, and they did. Then, as they reached their current plateau, and as others were predicting a decline in the rates, I pointed out that the inflationary pressure was still too great to allow the Federal Reserve to reduce the rates, and that is what has happened.
But, over the past few months, I pointed out various statistics that suggested that the economy, while not actually declining yet, had too many signs indicating at least a significant slowdown in the rate of growth in gross domestic product and other important economic indicators.
To this point, I have not predicted the Fed would soon be reducing those rates. Today, I think they will. In fact, unless some of the negative factors turn out to be just temporary adjustments, I expect interest rates to begin declining before summer.
The big question is just how long the Fed will wait before starting the process. Because of their cautious nature, I believe it will be another month or two. They will begin by making a small adjustment and then wait to see how the market reacts to their changes.
Why now? We all know about the severe adjustment occurring in the housing market. Also, gross domestic product, while not nearly in a recession, just has not had the performance the market wants. That is why the severe adjustment in all of the market indexes last Tuesday. As I write this, the market appears to be handling that adjustment well, but it still has to be accepted as an indicator of displeasure with market performance. It is still early enough that we see mixed signals. Durable goods sales are down significantly, but wages are up and inflation has certainly moderated.
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We also need to remember that today the term "the market" is not just the U.S. It is worldwide, and Tuesday's changes occurred around the world. In fact, in many markets, it was even worse. The Dow declined about 3.5 percent. In Singapore, the decline was 9 percent. Every year, what happens in other markets becomes more important to the U.S. economy.
Ag economics
A recent column I wrote about current agricultural markets caused a letter-writer to say I got it wrong. The first lesson those not familiar with farm markets probably learned is that there is not a monolithic theory of agricultural economics. Farmers and economists have disagreed forever as to what is the right answer to farm markets. That is why after nearly 80 years of the government trying to establish the correct food policy, every six years, when a new farm bill is written, the fight starts all over again.
Here in the Red River Valley, most would regard the sugar policy as an example of what a program should be. Move just out of the valley, and even farmers have said that is a bad program. I think negative publicity about that market results from misunderstanding and distortions.
First of all, sugar farmers do not get a so-called deficiency check. Instead, the program works by placing restrictions on the amount of sugar that can be imported into this country. Based on government estimates of domestic demand and supply, just enough foreign sugar is allowed into the country to keep the price at the program level.
This is very similar to the program livestock producers operate under. There may not be a target price, but livestock imports are restricted. Just this past week, there was a newspaper article about the livestock producers request to the USDA to restrict the amount of beef imported from Canada.
When it comes to the grains program the government first sets a target price for a commodity. Then the average annual a price is calculated. In the end, if one is due, they send the farmer a check for the difference.
It appears that because of the ethanol induced demand for corn farmers might not receive a check this year. Instead, they will get their money, and probably more, from the market.
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The definition of a subsidy has always been a bone of contention. It always will be.
Kingsbury writes a weekly column on the local economy. He can be reached at kae@invisimax.com or (701) 738-0028.
