Washington Insider -- Friday

Fight Over Fed Decisions

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

WSJ: US Refusing Trade Talks With China

The U.S. is not willing to resume trade talks with China until Beijing offers up concrete proposals to address U.S. complaints on forced technology transfers and other economic issues, according to the Wall Street Journal, again tempering expectations for a still-planned meeting November 29 between President Donald Trump and Chinese President Xi Jinping.

“If China wants [the G-20 session] to be a meaningful meeting, we need to do the groundwork,” a senior White House official said. “And if they do not give us any information, it is just hard to see how that becomes fruitful.”

China had requested to restart negotiations after the US imposed tariffs on another $200 billion in goods, but the U.S. rejected the request for talks with Treasury Secretary Steve Mnuchin. However, the item noted that China is unwilling to make such a formal offer, with officials concerned over making their negotiating strategy known and they are also concerned President Donald Trump could make their offer public.

China’s ambassador to the U.S., Cui Tiankai, said in an interview that China wants more discussions before making a specific offer. “People have to sit down together,” he said. “Then each side should make its own proposal.” Plus, they remain leery of negotiating with the Trump administration after Trump rejected prior offers that his senior officials had indicated would be accepted.

“You cannot have some tentative agreement one day and reject it next day,” he said.

NMPF: Tariff Losses Over $1bil Should Mean Additional Trade Aid

Annual losses for U.S. dairy farmers as a result of retaliatory tariffs currently in place could exceed $1 billion this year, with USDA's first round of trade aid falling "far short" of compensating for those losses, National Milk Producers Federation (NMPF) Chairman Randy Mooney wrote this week in a letter to USDA Secretary Sonny Perdue.

USDA's first round of payments under its Market Facilitation Program (MFP) – intended to help compensate ag producers for trade-related losses – are expected to total $127 million for dairy, Mooney noted. That is much less than the losses dairy producers are expected to endure due to the new tariffs.

While saying his group welcomed the "desire to aid farmers through USDA’s tariff mitigation program," Mooney said NMPF members "are greatly concerned about the level of aid that was provided in the initial effort."

Though early in 2018 US dairy producers were heartened to see futures markets suggesting "prices would improve later this year, rising well above second-half prices of the previous three years," those sentiments were "dashed when relations with several major trading partners were first disrupted in late May."

Specifically, he pointed to retaliatory tariffs imposed earlier this year by Mexico, China, and other nations in response to US tariffs on steel and aluminum and other goods. "Because of those actions, second-half prices this year will end up well below those of the previous three years," Mooney noted.

Washington Insider: Fight Over Fed Decisions

Well, there’s a fight underway now over Fed policies, and a former household name — the legendary banker Paul Volcker — has reappeared, Bloomberg says. Volcker is praising Jerome Powell, the current Federal Reserve chairman, for his willingness to face “fire from President Donald Trump for raising interest rates.”

“Powell handled himself exceptionally well” recently as he made the case for further rate increases, Volcker said this week. “He reflected the importance of maintaining price stability.”

Volcker was speaking ahead of publication of his autobiography, and said the Fed was at a “crucial period” when it’s tempted to delay tightening credit too long because the economy is doing well and inflation is not yet a problem.

“Powell reflected a little bit of the concern that we’re always too late” in raising rates to maintain price stability, added Volcker, who is credited with ending an era of double-digit inflation when he headed the Fed from 1979 to 1987.

Trump has repeatedly criticized Powell and his colleagues and recently called the central bank “the biggest threat to the economic expansion” in spite of the fact that he earlier called Powell “strong, smart.” Bloomberg says.

In defending the Fed’s strategy of gradual rate hikes, Powell says that a main task of monetary policy is to anchor inflation expectations at a low level — a lesson he says the central bank “learned under Volcker.” If consumers and companies believe price rises will skyrocket, they’ll act in ways that will help bring that about.

In his book — entitled “Keeping at It: The Quest for Sound Money and Good Government,” Volcker calls the Fed a “precious asset” that “does need to be shielded from partisan politics.”

Volcker frequently points out that he is no stranger to presidential pressure on the Fed. He recounts being summoned to a meeting with President Ronald Reagan in the summer of 1984 when Chief of Staff James Baker told him he was being ordered not to raise rates before the election.

In highlighting the importance of price stability in the book, Volcker writes that the Fed’s adoption of a 2% inflation target in 2012 was “ill-advised.” Pointing to comments by Fed officials and others, he worries that the objective might be increased while arguing that no index can completely capture the real change in consumer prices.

Volcker would prefer that the Fed had stuck with the verbal description of price stability proffered by his successor, Alan Greenspan: “That state in which expected changes in the general price level do not effectively alter business or household decisions.”

He also has misgivings about the Fed’s dual mandate to achieve both full employment and stable prices, saying it causes more harm than good. “I don’t want to forget about growth,” he said in the interview. But “if you worry too much about growth at the expense of inflation, then you’re in trouble.”

Emphasizing that sound finance as well as price stability is critical for the health of the economy, Volcker doubts that banks and their lobbyists will succeed in their efforts to undo many of the reforms put in place after the financial crisis. They’re “going to find it difficult to roll it back more than they’ve already tried,” he said.

He also called lobbyists’ complaints about the so-called Volcker Rule that restricts banks from investing their own capital “hogwash.”

“The banks are more profitable and hopefully a little safer,” he said. “There’s no indication of a lack of liquidity in the market.”

Volcker says that he decided to write a memoir because of his concern over a “breakdown in the effective governance of the United States” that has been going on for some time. He blames polarization and the growing influence of money in politics for the paralysis he sees in public policy making.

He is scathing about the ways of Washington in his book, calling lobbyists “chipmunks” and labeling the city a “swamp” of special interests — a description also used by the president.

In fact, Volcker doesn’t demur when it’s noted that some of his criticisms sound a lot like those made by Trump and self-proclaimed Democratic socialist Senator Bernie Sanders about the system being stacked against the little guy. “I do think we are getting plutocrats,” he said. “Part of society is way out of touch with other people. It shows up in the maldistribution of income in recent years.”

So, we will see. The administration’s pressure to enhance economic growth to balance against recent increases in debt likely will mean continuing pressure on Powell to move more slowly on interest rates than he otherwise might be inclined to do. This is a very important fight, and one producers should watch very closely as it intensifies, Washington Insider believes.

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