Washington Insider -- Friday

War on the Fed and Push for Negative Interest Rates

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

Trump Delays Increases in China Tariffs With Talks Set For Next Week

Both China and the U.S. are confirming that there will be working-level or deputy-level talks between the two countries next week.

That came in the wake of President Donald Trump announcing Wednesday even he will delay for two weeks a tariff rate increase on $250 billion worth of Chinese goods ahead of upcoming trade negotiations.

“At the request of the Vice Premier of China, Liu He, and due to the fact that the People's Republic of China will be celebrating their 70th Anniversary.... on October 1st, we have agreed, as a gesture of good will, to move the increased Tariffs on 250 Billion Dollars worth of goods (25 percent to 30 percent), from October 1st to October 15th,” Trump said in a pair of tweets.

Meanwhile, China’s Commerce Ministry today welcomed the postponement and said Chinese companies had started making price inquiries for U.S. agricultural goods including soybeans and pork, although there were no details on the timing or size of any intended purchases. Beijing suspended purchases of the U.S. products in August.

Ministry spokesman Gao Feng said that the possible resumption of agricultural products is not a bargaining chip in trade talks. With top-level talks hoped for in early October, those are expected before October 15 which would open the door to a further postponement of higher U.S. tariffs.


EPA Finalizes Repeal of Obama-Era WOTUS Rule

Rollback of the Obama-era Waters of the U.S. (WOTUS) rule was finalized by the Trump administration Environmental Protection Agency (EPA) and U.S. Army Corps of Engineers on Thursday.

The Obama-era WOTUS rule expanded Clean Water Act jurisdiction to cover over 60% of bodies of water across the U.S. The rollback will narrow the scope of the CWA to the 1986 standards in place before the 2015 regulation while EPA continues work on a new update to the rule.

"With this final repeal, the agencies will implement the pre-2015 regulations, which are currently in place in more than half of the states, informed by applicable agency guidance documents and consistent with Supreme Court decisions and longstanding agency practice," EPA said in a September 12 statement.

Repeal of the 2015 rule will be effective 60 days after being published in the Federal Register.


Washington Insider: War on the Fed and Push for Negative Interest Rates

While President Donald Trump’s criticism of the Fed is not exactly news, there is a new wrinkle — he recently urged not only low rates but that the Fed should “get our interest rates down to ZERO, or less,” Bloomberg and others are reporting this week. “We should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term,” the President tweeted.

Bloomberg quickly called the idea “flawed” and noted that “while it’s true that the government could sell bonds at lower interest rates than those on much of its outstanding debt, it would have to pay a big premium to buy back and retire some old bonds, effectively negating the financial benefits. Certain mature treasuries, for instance, fetch prices of as high as $1.40 for every $1 of face value.”

The report also noted that the current federal funds target rate is already on a track to be lowered following a quarter-point reduction on July 31 — the first cut since the Fed lowered rates effectively to zero in 2008, during the worst financial crisis and economic downturn since the Great Depression.

Barrons weekly newsletter published by Dow Jones and Company went into even more detail but agreed that negative rates likely would bring their own problems.

Barrons cited industry views that the call for negative rates reflects the view of the self-proclaimed “King of Debt” and thinks the President’s view “that of a highly leveraged property developer…thinking about negative rates from the perspective of a borrower.” It cites especially comments by Paul Ashworth, chief U.S. economist at Capital Economics.

He notes that the Fed has been lukewarm at best about such a possibility, “partly because officials know that it could cause outrage among savers and drag the central bank into a political maelstrom.” Money-market funds also could see large-scale outflows which could disrupt short-term funding for businesses, banks, and perhaps even the Treasury.

Moreover, the record of negative rates in the euro zone, Sweden, Denmark, Switzerland, and Japan has been mixed, Ashworth continues. While bond yields have fallen below zero, banks been reluctant to impose negative rates on depositors, resulting in a squeeze on their profits.

Trump has said that the U.S. deserves to have subzero interest rates since it has “a great currency, power, balance sheet.” In fact, negative interest rates reflect the economic torpor in Europe and Japan. By contrast, U.S. interest rates were at their peak in real terms when it was “Morning in America” in the mid-1980s, Barrons said.

Long-term Treasury bonds briefly touched 14% in May 1984 — a full 10 percentage points above inflation. Now, real yields on Treasury inflation-protected securities are just above zero. The 10-year TIPS yields 0.14% while the 30-year TIPS yields 0.56%. After taxes, which are levied annually on the inflation adjustment, those yields already are below zero.

Unlike last year, Trump’s Fed bashing now seems unfounded, Barrons thinks — since the bank is already poised to cut its federal-funds target rate at next week’s meeting of the Federal Open Market Committee. The fed-funds futures market puts an 88.8% probability of a cut of 25 basis points then and a 72.3% probability of a further reduction of 25 basis points or more at its December meeting. The Fed also has ended the shrinkage of its balance sheet, the report said.

Meanwhile, the stock market has been rallying, with the S&P 500 retaking the 3000 level Wednesday for the first time since July 30. That left the benchmark just 0.82% shy of its record and up 2.54% since the start of the month. The Dow Jones Industrial Average was just 0.81% away from its all-time high.

The report concludes, “be careful what you wish for when calling for zero or negative interest rates, Mr. President.”

So, we will see. The President appears to have already turned the Fed’s attention toward guarding against negative impacts from trade fights and it will now be important to watch how large that shift proves to be — policies and trends producers should watch closely over the coming weeks, Washington Insider believes.


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