Washington Insider -- Tuesday

New Fed Hypothesis About Inflation

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

EPA’s Wheeler Says Small Refiner Exemption Actions Still Coming

EPA currently expects to make decisions on small refiner exemptions (SREs) under the Renewable Fuel Standard (RFS) for the 2018 compliance year in the next few weeks, according to Administrator Andrew Wheeler.

"We're going through them," Wheeler told reporters as he visited a refinery in Pennsylvania Monday. "We hope to be processing them and making decisions in the next few weeks and month at the most.”

EPA received the recommendations from the Department of Energy (DOE) in April relative to the SREs for the 2018 compliance year. However, no action has been taken as of yet on most of the requests. EPA data shows 40 SRE requests were received for the 2018 compliance year with two being declared ineligible or withdrawn, leaving 38 still pending.

President Donald Trump also asked EPA and USDA to come up with a resolution on the controversial topic after he was surprised by criticism of the SREs when he made a stop in Iowa in June to tout the allowance of year-round sales of E15 fuel. That order by Trump prompted a firestorm of criticism from those on both sides of the issue..

Proposed 2020 RFS Levels Finally Published

The proposed levels for 2020 biofuels and 2021 biodiesel under the Renewable Fuel Standard (RFS) were published in the Federal Register today.

The action proposes some reforms to the Renewable Identification Number (RIN) market, though the changes do not go as far as some had expected. The proposed rule also contains EPA’s response to a court order directing it to reassess its RFS levels for 2016. Comments on the proposed rule are due August 30.

The action reflects EPA’s apparent reset of the RFS for 2020 biofuel and 2021 biodiesel, though the rule that covers the full period of 2020-2022 has yet to be sent back to EPA from the Office of Management and Budget (OMB), with meetings on the RFS reset taking place last week.

EPA still signals the 2020 RFS levels will be finalized by the statutory November 30 deadline. The RFS reset plan, however, is listed as being targeted to be finalized in February 2020.

Washington Insider: New Fed Hypothesis About Inflation

Bloomberg is reporting this week that Federal Reserve Chairman Jerome Powell probably will kick off his post-meeting press conference on Wednesday the same way he’s begun every one this year – by telling reporters that the Fed has one over-arching goal: to sustain the economic expansion.

Behind that statement lies a grand ambition, Bloomberg thinks. Powell is effectively taking on a task that many of his inflation-wary predecessors shunned: extend the fruits of a growing economy to those who rarely benefit, from struggling African-American families to poor rural white people.

The improvement in the jobs market has “started to reach communities at the edge of the workforce,” Powell told lawmakers this month. “It’s just so important for us to continue that process for a couple of years.”

That means keeping the economy growing at or ideally somewhat above its long-run cruising speed of about 2%, and running a high-pressure labor market by holding unemployment at levels many economists think unsustainable.

To help in that effort and to protect the U.S. from downside risks from abroad, the Fed chief and his Federal Open Market Committee colleagues are expected to cut interest rates by a quarter percentage point after meeting today and Wednesday, lowering borrowing costs for the first time in more than a decade.

“I can’t remember a Fed chair who was as emphatic about the benefits of this high-pressure labor market to people who have long been left behind,’’ said Jared Bernstein, now at the Center on Budget and Policy Priorities and a former adviser to former Vice President Joe Biden.

Powell can afford to stoke the record-long expansion because inflation is contained and shows no sign of taking off in spite of unemployment near a half-century low. Indeed, the Fed would welcome some rise in price pressures after years in which inflation has languished below its 2% target.

The Fed chief also may be betting that pumped-up demand from lower borrowing costs will be met with added supply from the economy that will keep prices from skyrocketing.

That’s what happened in 2018, Bloomberg notes. At that time, a step-up in growth of GDP on the back of President Trump’s tax cuts was supported by an expansion in the labor force and gains in productivity.

There are risks, of course. Inflation may end up not being as tame as the Fed believes. There’s also a chance that low interest rates will lead to economically-dangerous asset bubbles and excessive borrowing that haunt the economy later.

Powell heard first-hand about the broad-based benefits of a tight jobs market at a Chicago Fed conference in June. “This is a great time” for economically vulnerable Americans who’ve had trouble getting a job, Patrick Dujakovich, president of the Greater Kansas City AFL-CIO, told the gathering. “There are a lot of prerequisites being waived” for getting hired.

Employers are taking on workers with limited skills and limited or no experience and hiring Americans with criminal records and disabilities. Companies are also being forced to raise wages to retain some lower-educated employees.

The Americans being helped the most by the tight labor market are “people at the bottom,’” said former Fed Vice Chairman Alan Blinder.

Powell has made clear he sees more room to run. At a congressional hearing this month, he took issue with a suggestion that the U.S. has a hot labor market.

“To call something hot, you need to see some heat,” he said, noting that wage growth has picked up but not yet surged. In a lively exchange at that same hearing with social media star Rep. Alexandria Ocasio-Cortez, D-N.Y., Powell said the current 3.7% unemployment rate was “well within the range of potential estimates” of its long-run natural state.

Back in 1973, influential economist Arthur Okun asked whether a high-pressure economy could contribute to upward mobility of workers, Bloomberg said. But a subsequent outbreak of double-digit inflation convinced central bankers that wasn’t the way to go.

Now may be time for a rethink, Powell suggested in a speech in Paris this month. Policy makers face a different world today: a world of low inflation, globalization and aging societies.

It’s also a world where yawning income and wealth gaps are spurring a populist backlash against the established economic order, including central banks. Powell has said repeatedly that it’s up to Congress and the White House to tackle such deep-rooted ills as income inequality and racial disparities in the labor market.

But he acknowledged this month that the Fed has a role to play, too. “What we can do,” he told lawmakers, “goes back to taking seriously the job you’ve given us, which is maximum employment.”

The conventional idea is that low unemployment and low borrowing costs risk inflation, a huge concern for traditional Republicans, among many others. In addition, there is the risk that the “modern” economy reflects new technologies and restructured resource needs, so where inflation fits in the modern world is uncertain, many observers conclude – but it has almost certainly not gone away. Thus, the new labor force “hypothesis” will be important for producers to watch closely if and when it emerges, Washington Insider believes.

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