Washington Insider -- Wednesday

War of Words Over Fed Policy

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

Administration Says Trump Still Wants Structural Changes in China

President Donald Trump and Chinese President Xi Jinping will meet Saturday during the G20 summit in Osaka, Japan, with a senior administration official not willing to commit to whether the talks are aimed at restarting the talks between the two sides that broke down in May or whether they are aimed at reaching a more formal agreement.

"It is really just an opportunity for the president to maintain his engagement as he has very closely with his Chinese counterpart,” the official said. “Even as trade frictions persist, he has got the opportunity to see where the Chinese side is since the talks last left off. The president is quite comfortable with any outcome.”

Trump remains insistent that there needs to be “structural real reform in China across a number of issues and a number of sectors, and nothing about that has changed," another administration official stated, noting the breakdown in talks have not changed the “ultimate goal” of the effort.


US, China Officials Spoke Monday on Trade Issues

U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steve Mnuchin held a telephone discussion with Chinese Vice Premier Liu He Monday, according to a statement from the Chinese Ministry of Commerce.

The two sides exchanged views on trade based on instructions from leaders of the two countries, the statement said, and the two sides agreed to maintain communications. The call took place at the request of the U.S., the Xinhua news agency said.

Commerce Ministry spokesman Geng Shuang provided no details on the coming talks between President Donald Trump and Chinese President Xi Jinping, but said China remained committed to develop relations between the two sides “based on coordination and cooperation.”

Washington Insider: War of Words Over Fed Policy

The New York Times said Monday that President Trump continued his assault on the Federal Reserve “blaming the central bank for reining in a U.S. economy that is on track to reach its longest expansion in history.”

For its part, the Times noted that the President’s criticism of the Fed comes at an “odd moment” since as of July 1, the U.S. will have experienced the longest economic expansion on record, ten years and running. The unemployment rate is at its lowest level in nearly 50 years, and inflation – though quiescent – has at least gotten close to the central bank’s 2% goal. By lifting rates from near zero and shrinking the massive volume of government-backed bonds on its balance sheet, the central bank has bought itself precious space to fight the next economic downturn when it comes, NYT said.

In addition, the Fed has already signaled that it is prepared to cut rates at its next meeting, with Fed Chairman Jerome Powell reiterating last week that officials will take steps to sustain the economic expansion.

Still, Trump continues to blame the Fed for not doing more sooner to goose an economy that, “according to most metrics, was not in need of additional goosing,” the Times said.

First quarter growth came in at a solid 3.1%. The Dow Jones industrial average has been climbing steadily this month, buoyed in part by promises of coming Fed rate cuts, and output growth trackers suggest that the economy probably grew around 2% in the second quarter – roughly in-line with the rate that most economists think it can sustain, given its demographics and investment level.

Still, Trump tweeted on Monday that the Fed “doesn’t know what it is doing,” and that without rate increases, the Dow Jones industrial average would be “thousands of points higher” and gross domestic product growth would be in the “4’s or even 5’s.”

The Fed lifted interest rates nine times between late 2015 and the end of last year, with four increases coming under Powell, whom Trump selected to lead the central bank. The tightening cycle was historically slow, as central bankers tested whether very-low unemployment would send inflation rocketing higher. So far it has not and when the economy showed signs of cooling heading into 2019, the Fed stopped raising rates. It is now poised to cut them as global growth slows and inflation remains tepid.

The President is correct that the Fed’s rate increases were meant to slow the economy, the Times thinks. The central bank’s job is to keep growth on a stable glide path, sacrificing booms to fend off high inflation and job-costing busts. And it is also true that the central bank’s moves have been controversial at times. The decision to raise rates for a final time last December, amid tight financial conditions and low inflation, drew criticism from economists and others across the political spectrum and spurred stock market turmoil.

Still, the Times thinks Fed discomfort is natural. “I don’t think the Fed can ever sit back on its achievements and feel comfortable,’’ said Mark Spindel, founder and chief investment officer at Potomac River Capital and the co-author of a book on politics and the Fed. “Trump is trying to foam the runway in case there is a slowdown.”

However, most economists say the major risks to the expansion come not from the Fed but from the administration’s trade war with China and slowing global growth. These include tariffs on $250 billion worth of Chinese goods and threats to tax all Chinese imports if a planned meeting with President Xi Jinping does not go well later this week.

The Fed itself is worried that trade woes, along with other factors, could weigh heavily on the economy and said at its meeting last week that it is open to cutting interest rates soon. If it does lower rates, it’s possible that it will also stop shrinking its swollen balance sheet, another policy the President objects to regularly because he sees that as draining stimulus from the economy.

Now, a growing number of experts project rate cuts this year – Powell noted that many of those who have not incorporated expected rate cuts into their baseline projections see them as increasingly likely. Following the recent announcement, investors have entirely priced in a cut in July and see the possibility for even lower rates come the Fed’s September meeting.

But, even as the Fed leans toward doing precisely what President Trump is urging, he has redoubled attacks. “What he’s done is he raised interest rates too fast,” the President charged over the weekend. “I think the economy’s so strong we’re going to bull through it. But I’m not happy with his actions.”

It is quite usual for executives to complain about monetary policy but an independent central bark is widely seen as essential for stable and vigorous economic growth. Thus, while tensions between the Executive and the Fed are normal, they should be watched very closely as they evolve, 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 U.S. Ag Policy, U.S. Farm Bill and DTN Ag News sections on their News Homepage.

If you have questions for DTN Washington Insider, please email edit@dtn.com