Washington Insider -- Monday

Fed Appears to Keep Cool as President Criticizes

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

US-Mexico Continue NAFTA 2.0 Efforts

U.S. and Mexican negotiators will continue their efforts this week ink a deal between the two countries to update the NAFTA agreement, an action that would set the stage for Canada to return to the negotiations.

Mexico’s chief trade negotiator Ildefonso Guajardo was upbeat Sunday after extensive talks with U.S. Trade Representative (USTR) Robert Lighthizer. Guajardo said he and other Mexican negotiators would do whatever necessary to reach an agreement with the U.S. that would then allow the return of Canada to the talks. Guajardo predicted that the U.S. and Mexico would need at least a week of work to resolve issues with Canada whenever the nation is invited to rejoin talks.

Expectations were that the two sides potentially would reach an agreement last week, but that did not happen.

Recent negotiations have also made progress over how much local content a car should have, and the cost of labor to produce a car, to qualify for tariff-free treatment under NAFTA 2.0.

“Our relationship with Mexico is getting closer by the hour,” tweeted President Trump on Saturday morning, as negotiators continued their work. “A big Trade Agreement with Mexico could be happening soon!”

Lawmakers Call on EPA to Boost Biodiesel Levels in RFS

While welcoming the EPA proposal to raise the biomass-based biodiesel requirement for 2020 to 2.43 billion gallons and the advanced biofuel level for 2019 to 4.88 billion gallons under their proposed levels for biofuels under the Renewable Fuel Standard (RFS), a group of bipartisan Senators said the levels still "underestimate the existing potential of the biodiesel and renewable diesel industries in our states."

Further, the lawmakers raised an issue that has become a rallying cry for biofuel backers: Small refiner waivers granted under the RFS which increased dramatically for 2016 and 2017 compared to historical levels. The lawmakers noted that law requires EPA to "accurately account for small refiner economic hardship exemptions in the final rule." The RFS proposal from EPA indicates there have been no hardship exemptions for 2019 and that the agency did not consider those exemptions in setting the proposed volumes.

"It is critical that EPA appropriately account for any small refiner economic hardship exemptions that it reasonably expects to grant during the 2019 compliance year in the final rule, or EPA will not be able to fulfill its duty to ensure RVOs (Renewable Volume Obligations) are met," the letter stated.


Washington Insider: Fed Appears to Keep Cool as President Criticizes

The one thing everybody in the financial world knows is that President Donald Trump is annoyed that the Federal Reserve is slowly increasing interest rates as the economy remains strong. So, it is news this week, Bloomberg says, that Fed officials are “trying hard to ignore” President Trump, and they’re going to keep doing that even if he continues to put pressure on the central bank to slow down or stop its interest rate increases.

Recently, at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, several policy makers responded to questions about recent remarks by the President with straightforward comments that their rate decisions won’t be affected.

“The job of a central bank and my job is to make decisions on monetary policy without regard to political considerations or political influence,” Dallas Fed President Robert Kaplan said in an interview. “I’m very confident we’ll do that.” The context is that observers believe that on other occasions, Fed officials have responded to politics — but it will not now.

The President told a group of Republican donors earlier this month that he was disappointed with his appointee, Fed Chairman Jerome Powell, over interest-rate hikes, having expected Powell to be a cheap-money central banker. That followed complaints last month, including via Twitter, about Fed rate hikes.

Pressed on whether Trump’s comments complicate their job, Kaplan and his colleagues mostly shrugged and repeated that the Federal Open Market Committee will simply carry on with its job.

“This committee is very focused on the mandate given to us by Congress to try to make decisions that are in the long-run interest of a growing economy,” said Esther George, president of the Kansas City Fed and host of the event that annually draws leading central bankers and economists from around the world to Grand Teton National Park.

On the sidelines, a number of the conference attendees said the Fed has very little choice but to demonstrate a thick skin and ignore the president just now. A suggestion that Fed officials should respond by raising rates more aggressively to prove their independence was roundly rejected, as was the idea that Powell should warn the president publicly against further commentary on rates.

“I think he should avoid any tit-for-tat exchanges with the president,” said Alan Blinder, a former Fed vice chairman. Powell, he added, should respond mostly with actions to show the Fed will act independently and remain focused on making the right decisions for the economy.

The chairman made no public response about Trump’s comments, Bloomberg said. He said in a July 12 interview with American Public Media’s “Marketplace” program that the Fed does its work “in a strictly nonpolitical way, based on detailed analysis” that doesn’t take political considerations into account.

Another former Fed vice chairman, Donald Kohn, said he was confident the committee would not be distracted from following its legislative mandate, but added that Powell could help shield the Fed from pressure by better communicating to the public the rationale for its policy decisions.

“The key is the Fed has to continue to explain in economic terms why it’s doing what it's doing, and how it’s related to its objectives,” he said.

So, Powell forges on with gradual Fed rate hikes amid strong growth, Bloomberg said.

Other attendees noted the irony that Trump is complaining about rate hikes, since Powell is widely seen by economists as having taken a very cautious approach so far to tightening policy, even as U.S. economic growth accelerates and unemployment, now at 3.9%, is at levels not seen in nearly 20 years.

“I am sure that the Fed is not going to depart from its very responsible strategy,” Jacob Frenkel, chairman of JP Morgan Chase International told Kathleen Hays in an interview on Bloomberg Television. “It may be politically attractive to bash the Fed for short-term causes. But really, it will not change anything.”

The Fed has raised rates five times since Trump took office in January 2017, a slower pace than during most past economic expansions.

At Jackson Hole on Friday, Powell said gradual increases will remain appropriate, but he made clear that with inflation still low he was not worried about the economy overheating and would not seek a more aggressive policy unless inflation expectations jumped.

So, we will see. Clearly, the president has an important stake in rapid economic growth — but the dangers of inflation are real and very important and require continuing vigilance. Chairman Powell’s current approach seems appropriate and should be applauded even as the political debates intensify, Washington Insider believes.

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