Hoenig Says Rising Rates Could Spur 33% Fall in Farm Values
Federal Reserve Bank of Kansas City President Thomas Hoenig said that an increase in interest rates could trigger a 33 percent decline in the price of agricultural land.
Land prices are possibly being driven by “inflationary impulses,” and “it’s also driven by interest rates” at unusually low levels, he said in a lecture for the Purdue University Department of Agricultural Economics.
Prices for irrigated cropland during the fourth quarter of last year rose 14.8 percent in parts of the seven states in the Kansas City Fed region from a year earlier, the bank said in a February report. The increase was 12.9 percent for non-irrigated land. A majority of rural bankers surveyed by the regional bank said land values would climb in the next few months.
Hoenig, speaking later in his presentation, reiterated his view that the Fed should raise the benchmark interest rate to 1 percent and then pause. He was the lone dissenter from every Fed meeting in 2010 and has repeatedly said the Fed’s near-zero interest rates and record monetary stimulus could lead to instability in financial markets and the broad economy. Hoenig plans to retire from the central bank in October,
High land prices are “perhaps where they’re supposed to be. I doubt it,” he said, noting that interest rates on loans to purchase agricultural land are far below the longer-run average of 7 percent to 7.5 percent.
“I’m not trying to be Chicken Little here and say the sky is falling. But if it’s too good to be true, it’s not true,” he said. “You can’t lever indefinitely at zero interest rates and not have that come down on you.”
In February, Hoenig testified to Congress that “this run- up in farmland values has occurred, however, amid financial markets characterized by high levels of liquidity and unusually low interest rates.”
“It is nearly impossible to determine how much of the farmland boom may be an unsustainable bubble driven by financial markets and how much results from fundamental changes in demand and supply conditions,” he told the Senate Agriculture Committee.
The price of corn has risen about 114 percent in the last year, according to the Department of Agriculture. The price of cotton has increased about 143 percent in the same period. National average gas prices were $3.82 on April 14, up 33 percent from a year earlier, according to the American Automobile Association.
The Labor Department reported today that overall prices in March were 2.7 percent higher than a year ago and core prices 1.2 percent higher.
“So-called core inflation was up modestly, total inflation up robustly, but total inflation is what I worry about,” Hoenig said.
The presidents of the Fed’s regional banks rotate voting on monetary policy. Hoenig does not vote this year. The central bank said in its March policy statement that the pressures from rising commodity prices are likely to be “transitory” and said that “longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.”
Hoenig, the Fed’s longest-serving policy maker, will retire exactly two decades after beginning his tenure as Kansas City Fed president in 1991. He is required under internal Fed rules to retire at age 65, an age he will reach in September. He joined the Kansas City Fed in 1973 as an economist in banking supervision after earning his doctorate at Iowa State University.
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