Washington Insider -- Wednesday

President Disputes Fed Policies

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

Still Questions As USDA Says ‘Minimal’ MFP Payment on Cover Crops on Prevent Plant Acres May Come

USDA does not have the authority issue Market Facilitation Program (MFP) payments on unplanted acres, USDA said in a statement issued late Monday, a stance that matches their position from the start of announcing the Market Facilitation Program 2 (MFP 2) payments – only 2019 planted acres will qualify.

USDA is “exploring legal flexibilities” for a “minimal” per-acre MFP payment if farmers plant an MFP-eligible cover crop on prevented plant acres “with the potential to be harvested and for subsequent use of those cover crops for forage,” according to the statement issued by USDA Secretary Sonny Perdue ahead of an Iowa visit with President Donald Trump and Sen. Joni Ernst, R-Iowa.

Details, however, remain scarce in terms of how much any payments will be.

USDA also reiterated what they have previously said: 2019 MFP assistance is based on a single county payment rate multiplied by a farm’s total plantings to the MFP-eligible crops in aggregate in 2019, according to USDA. Those per acre payments are not dependent on which of those crops are planted in 2019, and therefore will not distort planting decisions. And, total payment-eligible plantings cannot exceed your total 2018 plantings.

Trump Issues Fresh Warning to China On Trade

The latest warning from President Donald Trump via comments to CNBC in which he warned Chinese leader Xi Jinping that a new round of tariffs would be levied on the country’s goods if the two leaders failed to meet at the G20 summit in Japan.

Trump said he believed there would be a bilateral meeting with Xi in Osaka on the sidelines of the world leaders’ gathering later this month. But Chinese officials have not confirmed their president’s acceptance of such a bilateral encounter, and this has clearly upset Trump based on his comments.

“I think the differences can be worked out very easily. I would be surprised if he did not go,” Trump said. But he warned that levies on $300 billion of additional Chinese imports would be imposed immediately if Xi failed to show up, on top of a 25% tariff in place now on $250 billion of goods.

"We are expected to meet. If we do, that is fine, and if we do not, that is fine. Look, from our standpoint, the best deal we can have is 25% on $600 billion, OK?”

Washington Insider: President Disputes Fed Policies

President Trump has often disagreed with Fed policy and is attacking it now even as it considers a rate cut, the New York Times said this week.

For example, he lamented earlier that the Fed, which is independent of the White House, “did not operate like China’s central bank, which is largely subservient to the government.” Then, he renewed his criticism on Monday, charging that the Fed erred in lifting interest rates last year “and put the United States at a disadvantage to China.”

“The head of the Fed in China is President Xi,” Trump said in an interview asserting that “he can do whatever he wants.”

Trump has repeatedly attacked last year’s decision to raise rates, accusing it of undermining his economic policies and slowing growth. And he has frequently urged the Fed to cut rates and take additional steps to stimulate economic growth.

His latest rebuke comes at a pivotal moment. The Fed has paused its steady march toward higher rates and begun reorienting policy toward potential cuts amid slowing economic growth.

Markets now expect the Fed to cut rates within the next two months. Futures prices suggest that a cut by the end of July is now about 84% priced into markets, up from less than 20% a month ago.

But Trump is putting the Fed’s chairman, Jerome Powell, and his colleagues in a difficult spot. The president’s trade war with China—including his threat to slap tariffs on virtually all remaining Chinese imports if no agreement is reached—is creating uncertainty, causing businesses to put off investment and hiring.

If it intensifies, the economic drag might be enough to prompt Fed rate cuts, the Times said.

But by lowering borrowing costs, the central bank would be giving Trump exactly what he wants, creating a risk that it will look political even though it is acting on economic fundamentals.

The President also charges that China devalues its currency, making its goods cheaper to buy and putting U.S. products at a disadvantage.

“They devalue their currency,” Trump said. “They have for years. It’s put them at a tremendous competitive advantage and we don’t have that advantage because we have a Fed that doesn’t lower interest rates. We should be entitled to have a fair playing field.”

Before adopting its current cautious stance, the Fed had raised rates nine times since late 2015, with four of those coming after Trump nominated Powell to lead the central bank. It has also been shrinking its large balance sheet of government-backed bonds – which it amassed in the wake of the financial crisis to help prop up the economy – though it is in the process of slowing and stopping the drawdown.

Trump seemed to blame Fed policy partly on personnel, including the four of the Fed’s five board members in Washington that he nominated. However, boards at the 12 regional central banks select their own leaders and 13 of the 17 of those experts were not selected by the White House.

As a result, he charges that the Fed “had not listened to him and that they’re not my people.” However, all four of the Fed governors he selected voted in favor of rate increases last year, including Powell, Richard Clarida, Randal Quarles and Michelle Bowman.

The Fed’s independence from the White House is by design so that its officials are free to make decisions that could cause short-term pain but are thought better for the nation’s long-term economic health.

The president’s regular attacks on the central bank break with a decades-old tradition of respecting that independence, the Times said.

Nevertheless, Fed officials regularly say that they will set policy with an eye toward achieving their two goals, stable inflation at around 2 percent and maximum employment, without paying attention to political commentary.

Powell and his colleagues have opened the door to potential rate cuts in recent weeks saying the Fed will set policy as appropriate to support its employment and inflation goals.

That’s not an explicit sign that a move is coming but it puts investors and economists on watch for a cut in the coming months, especially as uncertainty surrounding the administration’s trade negotiations with China lingers. Inflation was already running below the Fed’s goal and an employment report released last week showed a sharp slowdown in hiring, further stoking those expectations.

Reliable Fed policy is essential for reliable economic growth – and recent indicators are raising significant signs of slowdowns that should be considered closely by bankers and investors alike—and watched closely by producers as the economic policy debate continues, Washington Insider believes.

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