Washington Insider -- Tuesday

More Monetary Policy Confusion

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

EPA Biofuel Plan Draws Ire from Ethanol Backers

The levels proposed by EPA for 2020 biofuel and 2021 biodiesel under the Renewable Fuel Standard (RFS) drew criticism from ethanol industry backers, including Sen. Chuck Grassley, R-Iowa.

"It is unacceptable that EPA would set biofuel volumes below demand at a time when farmers, biofuels producers and agribusiness owners are forced to shed jobs and close plants," Grassley said in a statement. “I urge President Trump to compel EPA to reverse course and keep his word to the forgotten Americans who have faithfully stood with him."

The Renewable Fuels Association (RFA) also leveled criticism at the proposal, with President and CEO Geoff Cooper saying, “EPA appears to be selling out to oil refiners — again — at the expense of rural America.”

“As long as EPA continues to dole out compliance exemptions to oil refiners without reallocating the lost volume, the agency may as well start referring to the annual RFS levels as ‘renewable volume suggestions’ rather than ‘renewable volume obligations,’” Cooper continued. “It is a complete misnomer to call these blending volumes ‘obligations’ when EPA’s small refinery bailouts have essentially transformed the RFS into a voluntary program for nearly one-third of the nation’s oil refineries.”

FAO, OECD See China Pork Output Rising In 2020 Forward But Note US Trade Issues

China has been severely impacted by African swine fever, with the disease cutting production in the country, according to the annual Agricultural Outlook 2019-2028 report from the UN Food and Agriculture Organization (FAO) and the Organization for Economic Cooperation and Development (OECD), but their production is expected to rise 2020 forward.

The report likened the situation in China with ASF to that from 2007-2008 when Porcine Respiratory and Reproductive Syndrome (PRRS) epidemic reduced domestic supply. The agencies said the current outlook sees pork production in 2019 in China down by five percent.

“For 2020, production and consumption is projected to return to the 2018 level and resume its trend in growth for the remainder of the outlook period,” the report said.

The supply shortage in China is expected to result in nearly two million tonnes of imports, the report noted. “With increased tariffs imposed on U.S. exports of pigmeat, Brazil, Canada and the European Union are projected to benefit from China’s increased import demand.”

Washington Insider: More Monetary Policy Confusion

Monetary policy continues to attract headlines this week as Politico reports that while for much of the past decade, Republicans including President Donald Trump, ripped the Federal Reserve for keeping interest rates too low – a policy they said risked blowing up giant asset bubbles and artificially boosted the economy under then-president Barack Obama.

Now President Trump and his top internal and external advisers are blasting the Fed for raising interest rates and demanding the central bank pump cash into the system to boost the economy as the 2020 election approaches.

And, increasingly, it seems that the president himself wants a new Fed chair, preferably one of the new converts to the idea of easy-money policies. Last week’s nominations fit that mold and included “one of the biggest flip-floppers on interest rate hikes” for a seat on the Fed board, Politico said.

“Given that Trump has flip-flopped so much on rates, it’s not surprising that he’s stacking the deck with other flip-floppers,” said Megan Greene, economist at the Harvard Kennedy School of Government. Politico charged that “Trump himself executed the sharpest about-face on interest-rate policy.”

While running for president in September 2016, he said of the Fed: “[W]hat they are doing is, I believe, it’s a false market. Money is essentially free.” He said then Fed Chair Janet Yellen “should be ashamed of herself.” In November 2015, Trump said low rates were creating a bubble and that “Janet Yellen should have raised the rates.”

Trump as president dumped Yellen as Fed chair and installed Republican lawyer and Fed governor Jerome Powell who continued Yellen’s policy of gentle rate hikes in a period of low unemployment and solid growth — fueled in part by the GOP tax cuts.

More recently, over the last several months, Trump has been on an angry tear against Powell, demanding the Fed chair lower rates. Last month he accused the Fed of behaving like a “stubborn child” and said “we need rates cuts, & easing.”

One of the President’s intended Fed nominees, Judy Shelton – alongside St. Louis Federal Reserve economist Christopher Waller – publicly called for dropping rates to as low as zero after reports emerged that she was on the short list for the Fed, “to ensure maximum access to capital,” she said.

That could not be more different from her longstanding contention that the Fed should strive for no inflation – rather than its current 2 percent target – a position that would call for higher rates in the face of inflation hovering a bit below 2 percent. She has also railed for years against low rates that have made “suckers” out of savers.

Trump’s top economic adviser, Larry Kudlow, also spent several years criticizing the Fed’s moves to slash rates to near zero after the financial crisis and its policy of “keeping them there for seven years, until Yellen executed the first hike in December 2015.”

In March 2010, in a column headlined “Yellen is Spellin’ Future Inflation,” Kudlow warned of inflationary risks from Fed policy and predicted that Yellen “will be the last Fed governor to turn out the lights on the central bank’s zero interest rate.”

Now, however, Kudlow is calling for an immediate half-point cut in rates and said he changed his mind on Yellen and interest rates well before Trump’s rise. “I got off the inflation thing years ago, around 2013,” he said. “I think I’ve been very consistent.”

He also notes that his advocacy for rate cuts amounts to a call for the Fed to acknowledge that it went too far in its hikes, not that the entire policy of trying to return to a more normal rate environment was wrong.

Kudlow also said he is worried about the fact that long-term interest rates are now lower than short-term rates, a so-called inverted yield curve. “That’s an unholy place to be. I don’t know that it spells recession. I’m just saying it makes me uneasy,” he said.

Progressives who have long advocated for the Fed to hold off on rate hikes and allow the economy to run hotter and draw more people back into the labor force are skeptical of all these rationales for conservatives flipping their views on monetary policy. But they also point to the data for the past decade, showing that conservative “hawks” warning of impending inflation from low rates have been wrong.

“Their sudden, 180-degree conversions suggest political opportunism,” said Sam Bell, policy director of Employ America. “And he’s for lower rates for different reasons than I am.”

Economists also question whether rate cuts, which the Fed has now signaled are coming, will actually do much to boost the economy. They could instead lead to higher stock prices in the short term while not impacting the real economy very much.

“I don’t think rate cuts will actually help much,” Greene said. “There is not a credit supply problem. It’s a credit demand problem. The cost of borrowing is hardly a constraint. Nobody is reporting problems getting credit.”

So, we will see. There is much about the current economy as well as the monetary proposals that is extremely controversial and likely misunderstood – and further politicizing the Fed has been a high risk policy in the past and could be again, so the current debate is important and one producers should watch closely as it intensifies, Washington Insider believes.

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