Why Does The Fed Keep Raising Rates?

Everywhere I go bankers and producers are asking about the interest rates these days. Since about 24 months ago, the Fed funds rate has risen from 1 percent to over 5 percent. The question that comes to mind is “why?”

First, the new Fed Chairman, Ben Bernanke, is a big believer in targeted inflation. The target inflation rate is somewhere between 2 percent and 4 percent. Bernanke has published papers concerning inflation. He has found that after analyzing countries with developed and emerging economies, those that have prospered have been able to maintain inflation rates under 4 percent. In other words, low inflation provides an environment conducive to high productivity, which allows countries to enjoy high standards of living.

That being said, in previous columns I have indicated that the Fed funds rate would go as high as 5.5 percent. If the U.S. continues with a high core inflation rate, don’t be surprised if the Fed funds rate goes up to 5.75 percent or 6 percent by year end. This would equate to about a 9 percent prime rate.

My e-mail address is: sullylab@vt.edu

Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.

To see Dave Kohl's previous road warrior adventures type Dave Kohl in the Search blank at the top of the page.

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