Washington Insider -- Monday

Intensifying War on the Fed

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

EPA Makes Only Slight Changes in 2020 RFS Plans vs 2019

EPA has proposed little changed for the targets for 2020 biofuel and 2021 biomass-based biodiesel under the Renewable Fuel Standard (RFS).

Compared to 2019 levels for biofuel, the only adjustment is for cellulosic and advanced biofuel, with cellulosic ethanol increased 120 million gallons and that also resulted in a 120 million gallon increase for advanced biofuel as cellulosic ethanol is a component of advanced biofuel.

“This entire increase for each category is attributable to increased projection of cellulosic biofuel production in 2020,” EPA said in a draft version of the proposed rule.

As for the advanced biofuel level, EPA noted they “investigated the projected availability of non-cellulosic advanced biofuels in 2020.” Several factors went into the level proposed, including, “constraints on the ability of the market to make advanced biofuels available, the ability of the standards we set to bring about market changes in the time available, the potential impacts associated with diverting biofuels and/or biofuel feedstocks from current uses to the production of advanced biofuel used in the U.S., the fact that the biodiesel tax credit is currently not available for 2020, the tariffs on imports of biodiesel from Argentina and Indonesia, as well as the cost of advanced biofuels.”

There is no change proposed for the conventional biofuel – primarily corn-based ethanol – as that remains at 15.0 billion gallons. But the total renewable fuel level is proposed at 20.04 billion gallons, up 120 million – a reflection of the increase for cellulosic ethanol.


Fall in Imports Still Failed to Keep Agriculture from Posting a Trade Deficit

U.S. agricultural exports rose in May while U.S. agricultural imports fell, but the sector still registered its second consecutive monthly trade deficit.

The value of exports rose to $11.4 billion, up from $11.24 billion in April. Imports fell to $11.65 billion, down from a record $12.1 billion in April, which left a trade deficit of $250 million compared with the record from April of $865 million.

This is the first time U.S. agriculture has registered back-to-back monthly trade deficits since April and May of 2016.

Fiscal Year (FY) 2019 U.S. ag exports have reached $92.42 billion, down from $99.19 billion at this point in FY 2018. Imports, meanwhile, are valued at $88.89 billion, up from $86.83 billion at this stage in FY 2018. With USDA forecasting FY 2019 U.S. ag exports at $137 billion, exports would need to average $11.15 billion per month to hit that mark.

However, the final months of the fiscal year typically do not see lofty U.S. export values. But if U.S. ag exports match the year-ago levels for the remainder of FY 2019, U.S. ag exports would total just under the USDA forecast. For imports, they would need to average $10.03 billion to hit USDA’s FY 2019 forecast of a record $129 billion. That would seem to be a reachable mark even though imports typically decline in the final months of the FY.

Since October 2017, the value of U.S. ag imports has only been below $10 billion two months. The biggest risk would appear to be USDA’s import forecast being too low, but the export mark could prove difficult to reach.

Washington Insider: Intensifying War on the Fed

It appears that President Donald Trump is sharpening his attack on the Fed, and that he may even be “grooming replacements,” Bloomberg says this week. Most recently, he called “the bank a bigger problem than U.S. competitors.”

Bloomberg thinks that the fresh criticism is consistent with ideas that the president is laying the groundwork to replace Fed Chairman Jay Powell when the chairman’s term is up in 2022 — or, perhaps earlier if the Fed doesn’t bend quickly enough to his will.

“Our most difficult problem is not our competitors, it is the Federal Reserve,” Trump said in a Twitter post late Friday. The Fed had “raised rates too soon, too often” and “doesn’t have a clue,” he said.

Trump last week nominated economists Judy Shelton and Christopher Waller to seats on the Fed’s board of governors. While their backgrounds are divergent, both are thought likely to enthusiastically support calls for lower interest rates.

Either may be in line for the Fed’s top job once Powell’s term as chairman expires or even before, Bloomberg said.

Trump discussed firing Powell in late 2018 and asked White House lawyers earlier this year to explore options for removing him as chairman. Last month the president denied in an interview that he’d threatened to demote Powell back to a board governor — Powell’s term on the board runs until 2028 — but said he’d “be able to do that if I wanted.”

Powell has said that he intends to serve his full four-year term at the helm of the Fed and that “the law is clear” on that issue.

The Federal Reserve Act says governors may be “removed for cause” which generally has been taken to mean inefficiency, neglect of duty or malfeasance — not merely policies that displease the commander-in-chief. Trump’s regular assertions of policy missteps may be a way to build a case for neglect of duty.

The latest comments by Trump — two rounds on Friday alone — came after the government said June growth in payrolls smashed expectations and overturned ideas that the central bank was almost certain to cut rates at its July 30-31 meeting, as the president has urged.

President Trump pointed to low U.S. inflation and claims that “other countries around the world are doing anything possible to take advantage of the United States, knowing that our Federal Reserve doesn’t have a clue! They raised rates too soon, too often, & tightened, while others did just the opposite...”

Growth “would be like a rocket ship” if the Fed eased, Trump told reporters at the White House on Friday.

The criticism seems to be escalating now that the most recent jobs report for June shifted the debate from how much to cut interest rates this month to whether to move at all.

Yields on two-year U.S. Treasuries previously jumped to 1.87% from 1.76%, reflecting reduced odds of the Fed aggressively reducing borrowing costs in the near term. Fed funds futures, which had been indicating some possibility of a half-point rate cut in July before the Labor Department’s data, are now pricing a quarter-point reduction this month, and at one point on Friday even showed that outcome was less than 100% certain.

Powell, who has said uncertainties in the U.S. outlook could call for lower rates, will give his read on the economy in two days of semiannual testimony before Congress starting Wednesday.

Beyond that, policymakers at the Federal Open Market Committee meeting this month will discuss whether the U.S. needs an “insurance cut” amid a slowing global economy, trade frictions and low inflation.

While the Fed dropped “patient” from its policy guidance at its June meeting, the strength in the pace of hiring could enable the FOMC to delay the onset of a mini-easing cycle until September; but the central bank will still need to cut in order to steepen the yield curve.

Payrolls climbed 224,000, compared with the median economist estimate for 160,000, after a relatively weak 72,000 advance the prior month, U.S. Department of Labor said. The jobless rate ticked up to 3.7% from a half-century low of 3.6% while average hourly earnings increased 3.1% from a year earlier, slightly less than projected.

In a report after the employment release, Goldman Sachs Group Inc. economists led by Jan Hatzius said recent Fed speeches and interviews suggest the central bank will go ahead with a cut in July.

“The July meeting is probably a closer call than what the markets are implying,” said Neil Dutta, head of economics at Renaissance Macro Research. “If you were thinking they would cut rates three times this year, the momentum is so strong in July that that is not going to happen.”

In a separate tweet Saturday, President Trump said the U.S. is the “envy of the World” after all three U.S. stock indexes closed at record highs before the July 4 holiday. On the eve of his formal re-election announcement, Trump warned of an epic stock market crash if he was not returned to office in 2020.

While the President continues to push for growth, much of the public continues to be concerned about inflation, in spite of the fact that that threat has not been apparent lately. Also, possible threats to Fed independence could be a downside to the current skirmish, a fight producers should watch closely as it intensifies, Washington Insider believes.

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