From the President's Desk

Word Salad on Interest Rates

Since the last article about the European Union Deforestation Regulation (EUDR) was published, the EU has delayed its implementation until December 30, 2025, for large importers, and June 30, 2026, for small importers. Word has it that the EU wasn't ready for compliance recording, so the delay allows them to get the infrastructure in place for their tracking purposes. There is hope that concessions will be made for U.S. exporters, but I doubt it.

On to the crux of the article, the Federal Reserve reduced its interest rate by .50% on September 18, 2024. Many people have asked me my opinion of where we think interest rates may land and whether there will be decreases in the near future. The answer to the first question is that I have no idea where this is going to land, but there are several factors that influence interest rates set by the Federal Reserve.

The Federal Reserve was established to control inflation and keep the economy running smoothly. The first factor that affects interest rates is inflation. If inflation is high, the Federal Reserve raises interest rates to get people to reduce spending. As witnessed when an enormous amount of money was pumped into the economy over the past four years, people spent that money and raised the price of goods due to demand. When inflation is low, interest rates are reduced to encourage people to spend more money. Also, when economic information detects that the gross domestic product is strong, the labor market is tight, and wages are rising, the Federal Reserve uses interest rate increases to cool the economy and control inflation factors that arise from a strong economy. Related to lending, investors want higher rates of return for loans to cover the spread between the purchasing power of buying goods and the money they lent to individuals, corporations, and the government.

Secondly, there is a supply and demand for loans. When borrowing is needed on a large scale, lenders will charge higher interest rates. The opposite effect is seen when the demand for loans decreases. However, banks need a spread to cover loan opportunities; therefore, the federal reserve rate affects the prices that are set on bank lending.

Next, when the government runs a large deficit, it must borrow money and issue bonds. To entice investors to buy the bonds, it raises interest rates. However, when geopolitical events are on shaky terms, and a global recession is likely, there may be demand for safer securities like U.S. government bonds, which reduces interest rates.

In my opinion, the Federal Reserve is walking a tightrope. Individuals have high personal debt rates right now. Credit cards and bank debt are the drivers, as COVID relief funds have been depleted from personal funds. This means that people have a reduced ability to borrow more money, making the demand for loans lower than in a stable economy. Also, the labor market seems tight to business owners; however, unemployment is creeping up, though it is below its historical average.

Finally, there is not a global recession at this point; however, with the tensions around the world, some analysts are saying the chances for a global recession are increasing.

With all of this said, it seems there are more factors for small interest rate decreases if unemployment continues to tick up. Also, there is the factor of personal debt right now that could influence some more rate cuts along with the rising risk of a global recession. However, in conclusion, the government debt that has been accumulated needs to be addressed. When that shoe falls, we are in a tough row to hoe.

With that, how about this entire article being a bunch of word salad? It sounds like we have a mess that will need a lot of cooperation to fix.

Troy Brown,

GLTPA President