Washington Insider -- Thursday

Trade Tensions and Fed Policy

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

FY 2020 Ag Spending Plan Includes Limits On USDA Actions

The House Appropriations Committee Tuesday approved their version of the Fiscal Year (FY) 2020 appropriations package for Agriculture and FDA, sending it forward on a 29-to-21 vote.

The plan includes provisions to prevent USDA from spending funds to move the Economic Research Service (ERS) and National Institute for Food and Agriculture (NIFA) out of the Washington, DC, metro area. The panel also approved amendments to freeze funding for USDA relative to finalizing its swine slaughter inspection rule, to prevent USDA closing nine facilities under A Forest Service program for at-risk youths and would prevent FDA from approving research involving gene-editing of human embryos.

The panel rejected an effort to raise the minimum age for tobacco sales to 21 from the current 18.

The package would provide $24.3 billion in discretionary spending for USDA, FDA and the Commodity Futures Trading Commission, above $1 billion more than the FY 2019 enacted mark.

Lawmakers Push USDA to Put Strict 'Actively Engaged' Rules In Place

USDA should make sure that it applies a strict requirement relative to what is considered actively engaged in farming as it implements 2018 Farm Bill provisions that added first cousins, nieces and nephews to the definition of family members, according to Sen. Chuck Grassley, R-Iowa, and Rep. Jeff Fortenberry, R-Neb.

In a letter to USDA Secretary Sonny Perdue, the lawmakers labeled the expanded family definition in the farm bill as "highly controversial" even as the bill won approval by a wide margin. They called on USDA to make sure that expanding the definition of family members does "not turn into an even larger loophole that increases payments to passive investors and mega-farms."

The rule adopted in 2015 on actively engaged was applied to a very small percentage of farming operations, the two said, and USDA needs to "effectively administer the law." It is unlikely USDA will adopt the approach that Grassley and Fortenberry are calling for.

Washington Insider: Trade Tensions and Fed Policy

Trade policy concerns are everywhere and growing these days. For example, Bloomberg is reporting this week that Federal Reserve Chairman Jerome Powell signaled an openness to cut interest rates “if necessary,” pledging to keep a close watch on fallout from a deepening set of disputes between the U.S. and its largest trading partners.

Powell was referring to “trade negotiations and other matters,” on Tuesday in Chicago when he commented that “we do not know how or when these issues will be resolved.”

“We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective,” Powell told a conference at the Chicago Fed.

His message was reinforced by Vice Chair Richard Clarida, who noted that the Fed would “put in place policies that not only achieve but sustain price stability and maximum employment, and we’ll do that if we need to.” He also said the Fed can’t be “handcuffed” to financial-market moves and suggested it was too early to take a strong signal of concern from the inverted yield curve, though he would take it seriously if the situation persisted.

Bloomberg notes that this discussion is taking place as investors report that they have “aggressively increased bets the Fed will cut interest rates” this year in response to administration policies that “widened” ongoing trade tensions by threatening to impose new tariffs on Mexico unless migrant flows to the U.S. are reduced.

U.S. stocks surged following Powell’s remarks with the S&P 500 on track for its best gain since January. Treasuries initially pared losses before declining further, pushing up the 10-year yield to 2.13%, while the dollar was lower. Asian shares rallied on Wednesday.

“Powell is walking a tightrope – wants to stay optimistic with still solid growth, but willing to cut if need be," said Diane Swonk, chief economist at Grant Thornton in Chicago. “The threshold on a rate cut is falling.”

While investors have made clear they expect as much as half a percentage point of rate cuts from the Fed this year, Powell and his colleagues have also come under pressure from the president to ease borrowing costs to help boost the U.S. economy. Powell has been careful not to respond to the president’s barbs, promising to set policy as the economy dictates.

Powell’s speech was directed mainly to the Fed’s yearlong review of its monetary policy strategies, tools and communication practices. The review was triggered largely by longer-term worries over the Fed’s struggle to keep inflation close to its 2% target.

Low inflation, along with subdued long-run growth, has helped keep nominal interest rates near historic lows even after almost 10 years of economic expansion. Low rates will make it hard for the Fed to fight a recession because rates probably cannot be cut below zero, or what the Fed terms, the “effective lower bound.”

“The proximity of interest rates to the ELB has become the preeminent monetary policy challenge of our time, tainting all manner of issues with ELB risk and imbuing many old challenges with greater significance,” Powell said.

With inflation less sensitive to tightness in labor markets, it’s tougher to bring price gains back to target in a recovery, he said. But keeping rates low might not be the answer: “Using monetary policy to push sufficiently hard on labor markets to lift inflation could pose risks of destabilizing excesses in financial markets or elsewhere,” Powell said.

The two-day research conference is the centerpiece of the year-long review. Fed officials and leading academics are debating whether they need to make changes in order to shore up inflation expectations and improve their defenses for the purposes of fighting the next economic downturn, whenever it comes.

The conference, which was announced in November, takes place amid heightened volatility in financial markets, owing to increasing concerns about administration threats to further restrict global trade. It also follows a string of government reports on consumer prices that have shown inflation drifting below the Fed’s 2% target so far this year, which many economists fear will limit policy makers’ ability to stimulate the economy if necessary.

In remarks earlier on Tuesday, Chicago Fed President Charles Evans brushed aside the idea the Fed needed to cut rates in response to market pressure – and Bloomberg noted that he will participate in votes on monetary policy this year.

“With inflation being a little bit on the light side, there’s the capacity to adjust policy if that’s necessary – but the fundamentals for the economy continue to be solid,” he said. “The consumer is solid. I think we have to think through what this really means.” The FOMC next meets June 18-19 in Washington.

The market uncertainty looks real to a great many observers just now, especially to those who doubt the Fed’s capacity to move quickly if the outlook worsens. In addition, the effort to focus market penalties on an extremely important trading partner to achieve social rather than trade objectives – and the possibility of a sharp political fight over the process – is clouding the outlook and should be watched closely by producers as the dispute continues, Washington Insider believes.

Want to keep up with events in Washington and elsewhere throughout the day? See DTN Top Stories, our frequently updated summary of news developments of interest to producers. You can find DTN Top Stories in DTN Ag News, which is on the Main Menu on classic DTN products and on the News and Analysis Menu of DTN’s Professional and Producer products. DTN Top Stories is also on the home page and news home page of online.dtn.com. Subscribers of MyDTN.com should check out the US Ag Policy, US Farm Bill and DTN Ag News sections on their News Homepage.

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