The economic and interest rate environment in which food companies are operating is likely to be quite different from anything the current line-up of executives has dealt with. Assuming that leaders of most companies are changed from a decade ago, the marketplace in question has not witnessed Federal Reserve increases in interest rates for 10 years. Indeed, it is likely that most present-day executives have not been in their positions for longer than the seven years that the Federal Reserve maintained its zero basic interest rate. This is meant to say that the increase in interest rates announced by the Federal Reserve in mid-December marked the first such action many top food manufacturing executives have faced. Such a change will have implications across all of the food industry.
In mid-December, coincident with a meeting of the board of governors of the Federal Reserve Bank, the Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25 per cent to 0.5 per cent, compared with the zero to 0.25 per cent that had ruled since December 2008. Further, a forecast was made pointing to a federal funds rate of 1.375 per cent ruling at the end of this year, which would be the result of four quarterly increases of a quarter point.
There have been few surprises in the reaction of markets to these changes. Of overwhelming importance is the emphasis by the Federal Reserve’s chair, Janet Yellen, on avoiding sudden actions. “Gradual” is the promise made. As a result of this widely heralded move, the Federal Reserve raised the interest rate it pays on excess reserves to 0.5 per cent from 0.25 per cent. Its discount rate covering loans to member banks is boosted to 1 per cent. Commercial rates follow the same patterns.
Of importance to the food industry in ascertaining the impact of such actions is the Open Market Committee’s confidence that the rate increase will spur a desired rise in inflation, to the goal of 2 per cent annually. It was the combination of reduced unemployment, from its worst 10 per cent to 5 per cent currently, and inflation lagging well below the target that encouraged the move. Confidence is voiced about inflation rising to 2 per cent “in the medium term,” especially given the improving economic outlook. The committee acknowledges “the time it takes for policy actions to affect future economic outcomes.”
Just how the food industry will be affected by what is likely to be a totally new set of financial and economic forces depends largely on how successful the Federal Reserve is with these moves. This connection has prompted reminders of previous periods of Federal Reserve rate increases that both succeeded and in some instances miserably failed. Indeed, a few economists were prompted by the latest move to point out that interest rate rises have often in the past slowed business growth and even precipitated a sharp downturn. It is obvious from the volatile stock market reaction to the interest rate increases that agreement is lacking on what rising borrowing costs will mean.
If the assumption is made that advancing interest rates will put a damper on the overall business outlook, the food industry is uniquely grouped with energy and utilities as one of three industries that historically have gained during a period when most business is lagging. Here food’s standing stems from steady demand enjoyed regardless of economic trends, which hardly seems realistic in light of the Federal Reserve’s outlook. Similarly, the food industry ought to benefit from pressure on commodity prices stemming from excess supply and the dollar boosted by interest rate upturns curtailing foreign demand. Suddenly apparent is the vast uncertainty flowing from the end of the zero-interest rate era. The only sure thing, it now appears, is that managing the food industry is likely to be very different from what might have been previously experienced.