Washington Insider-- Monday

Internal Financial Policy Fight

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

WTO Trade Barometer Sees Trade Rebound

World merchandise trade has rebounded strongly following major declines at the beginning of the COVID-19 pandemic, but the outlook going forward is unclear as cases again rise in Europe and North America, according to the latest update of the World Trade Organization's (WTO) Good Trade Barometer.

The barometer provides real-time information on the trajectory of world merchandise trade relative to recent trends. The index's current reading of 100.7 is just above the baseline of 100, which indicates trade growth in line with the medium-term trend. It marks a major rebound form the record low 84.5 reading seen in August.

“All of the barometer's component indices were rising in the latest months, with some climbing above their medium-run trends while others remained depressed,” WTO detailed. Export orders and agricultural raw materials sub-indices “finished firmly above trend.” Meanwhile, container shipping and automotive product indices recovered to near trend, and air freight and electronic components indices remained below trend, WTO said.

Despite the recent rebound, WTO warned “trade related uncertainty remains high.” That uncertainty is linked to the second wave of infections, which “is already under way in Europe and North America, leading to renewed lockdowns that could trigger another round of business closures and financial distress,” it said.

Infrastructure Investments May Be On The Table In 2021

Lawmakers are looking at infrastructure one potential area ripe for bipartisan compromise under the Biden administration, the Wall Street Journal reports, as Democrats and Republicans face the possibility of another two years of divided government.

Efforts to craft a multiyear infrastructure bill repeatedly fell apart during the Trump administration, and disagreements on the scope of the legislation and how to pay for it will persist under the new president.

Congress faces the expiration of the existing spending plan known as the highway bill next Sept. 30, and a new measure could become a vehicle Joe Biden's proposed $2 trillion plan for transportation and other infrastructure. Lawmakers see the desire for economic stimulus as the country recovers from the coronavirus pandemic as a potential catalyst for a major infrastructure bill.

Washington Insider: Internal Financial Policy Fight

The New York Times is reporting that Treasury Secretary Steven Mnuchin had announced last week the discontinuation of several Fed programs, including those that support the markets for corporate bonds and municipal debt and one that extends loans to midsize businesses.

The emergency efforts expire at the end of 2020 but investors had expected some or all of them to be kept operational as the virus continues to pose economic risks.

Numerous pandemic-era programs are run by the Fed but use Treasury money to insure against losses. They have provided an important backstop that has calmed critical markets and removing them could leave significant corners of the financial world vulnerable to the type of volatility that cascaded through the system as virus fears mounted in the spring.

By asking the Fed to return unused funds, Mnuchin could prevent President-elect Joe Biden's incoming Treasury secretary from quickly restarting the efforts at scale in 2021.

“The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy,” the Fed said in a statement.

The emergency programs were backed by $454 billion that Congress appropriated in March as part of a broader pandemic response package. Because of the way the Fed's emergency lending powers work, Jerome Powell, the Fed chair, needs the Treasury secretary's signoff to make major changes to the programs' terms. Extending the end date counts as one of the changes that need approval.

The decision to close these programs and remove the funding appeared to come as a surprise to the Fed, which received a letter announcing the Treasury's intent to claw the money back on Thursday afternoon. Earlier this month, Powell had said the central bank and Treasury were just beginning to discuss whether to extend the programs.

Mnuchin did agree to extend other emergency loan programs that are not backed by the congressional appropriation, including ones that service the short-term market for corporate debt, one for money market funds, and one that backstops government small-business loans.

The Fed avoids taking credit losses when extending loans and throughout the pandemic crisis it has asked for Treasury backup for its riskier programs. If it returns any unused money that the Treasury has already dedicated to support the programs, as Mr. Mnuchin requested, the Biden administration will have less financial backup to restart the programs, the Times said.

That's because the congressional appropriation—$195 billion of which has been earmarked to specific Fed programs—cannot be used to make new loans after the end of the year. But while the law prohibits the treasury from putting money into the Fed's facilities after 2020, it does not obviously prevent the Fed from using already-earmarked treasury funding to insure its own loans and bond purchases.

“The loans, loan guarantees and investing that the treasury does is the applicable language,” said Peter Conti-Brown, a lawyer and Fed historian at the University of Pennsylvania. He said that while it may be possible to read the law as preventing new Fed loans, that is not the “obvious reading.”

Still, Mnuchin's move could leave the government with fewer options to help the economy just as the new administration takes office, the Times says.

“Treasury is right that a limited set of objectives have been achieved in terms of stabilizing bond markets,” Jason Furman, a prominent Democratic economist, said. “But what is the downside to continuing them as insurance against worse developments?”

Many of the Fed's programs, including one that buys state and local debt and another that encourages banks to lend to small- and midsize businesses, have been lightly used. But that is because they were designed as backstops—meaning that borrowers would likely only use them when times are bad.

With coronavirus cases on the rise, the economy may sour again, making the programs more necessary. As recently as last week, Powell warned of the potential for economic scarring and said that the economic recovery had “a long way to go.” But Treasury officials have expressed optimism that the economy is poised for a steady rebound and that the likely rollout of a vaccine by the end of the year further improves the economic picture.

Senator Patrick Toomey, Republican of Pennsylvania, who had been pushing Mr. Mnuchin to end the programs, applauded the decision. “Congress's intent was clear: These facilities were to be temporary, to provide liquidity, and to cease operations by the end of 2020.”

However, treasury's move prompted concern from Democrats. Bharat Ramamurti, a Democrat who sits on the congressional oversight body in charge of reviewing the various Fed and treasury programs, suggested that, legally, the Fed was under no obligation to give back the funds.

And, Secretary Mnuchin said Congress wanted key economic supports to end by Dec. 31, a view he expressed only after the vote count in the presidential election.

So, we will see. It would be less than surprising if a departing administration were to leave the odd negative trap surprise for the incoming crew—but the less of that sort of thing that takes place, the better. Clearly, the public is likely to have little tolerance for such measures given the continuing fight with both the virus and the economic pullback Washington Insider believes.

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