Washington Insider -- Friday

Tougher Fed Scrutiny for Future Rate Cuts Discussed

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

Commerce's Ross: US Focus With China Is On Getting Them To Follow World Trade Rules

The U.S. is "not opposed to trade with China," Commerce Secretary Wilbur Ross said at an American Chamber of Commerce meeting in Australia. But the U.S. is seeking to address "fundamental issues in our trade relationship with China, including forced technology transfers, cyber intrusions, the stealing of [intellectual property] and industrial subsidies to state-owned enterprises." He blamed China for causing "massive dislocations due to overcapacity and dumping excess production into global markets."

Getting China to "abide by the global rules of trade, every nation in the world will benefit - including China. China is, after all, a real powerhouse. It is growing rapidly. And with its success comes responsibility - its responsibility to act as a member of the global community."

China has not changed its behavior since joining the WTO, Ross stated. "In fact, its practices have become more protectionist than before," he said.

In other remarks in Australia, Ross noted that the U.S. does not like to use tariffs. "In fact we would prefer not to use them, but after years of discussions and no action, tariffs are finally forcing China to pay attention to our concerns," Ross said, according to Reuters.

AFL-CIO'S Trumka says USMCA would be defeated in pre-Thanksgiving vote

If a House vote on the U.S.-Mexico-Canada Agreement (USMCA) is taken before Thanksgiving, AFL-CIO President Richard Trumka told the Washington Post in an interview that it would be a "colossal mistake" and "the agreement would be defeated."

However, Trumka did not rule out his organization backing the deal, provided that labor enforcement issues are addressed. "If they can't enforce their own laws, we have a real problem," he said. "No agreement will be able to work."

Should those items be addressed, Trumka said, "we can get to yes. If we can't get them fixed, we can't get to yes.".

Washington Insider: Tougher Fed Scrutiny for Future Rate Cuts Discussed

There is a great deal of tea-leaf scanning these days regarding possible future Fed moves. Bloomberg says that Fed officials in September began debating "how far their current interest-rate cutting campaign should extend, even as they agreed to lower rates in response to growing risks to the U.S. economy."

Bloomberg noted that participants at the September Open Market meeting generally judged that downside risks to the outlook for economic activity "had increased somewhat since their July meeting, particularly those stemming from trade policy uncertainty and conditions abroad." The minutes of the Sept. Federal Open Market Committee meeting were released Wednesday.

In discussing policy beyond the September session, however, several committee officials made a push for the FOMC's statement to signal the limits future policy easing.

"A possible base case for the Oct. 30 meeting is that the Fed will cut rates another 25 basis points, but then add language to the statement to signal that the bar for additional cuts is getting higher," Roberto Perli, a partner at Cornerstone Macro LLC in Washington, wrote in a note to clients. "That would also be a way to address the obvious divisions inside the committee about the desirability and extent of future rate cuts."

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, was more skeptical that Fed officials might soon put down such a marker. "Between October and December you're going to have two jobs reports, some Brexit developments -- a lot of things can happen," he said. "I don't know that a day after October they want to put things on a pre-set course."

At their September meeting, the FOMC lowered rates by a quarter percentage point for the second time this year -- a move Chairman Powell described as providing insurance against risks threatening the economic outlook.

However, projections on the best future path for rates, also released after that meeting, showed divisions among policy makers. Five thought it was a mistake to cut rates, five agreed with the reduction and thought that would be enough this year, and seven favored another decrease by December.

The minutes again reflected concern over slowing global growth and uncertainty created by the administration's trade disputes. "Several participants mentioned that uncertainties in the business outlook and sustained weak investment could eventually lead to slower hiring, which, in turn, could damp the growth of income and consumption," the record of the gathering said.

Officials agreed consumer spending was increasing at a strong pace and household spending was likely to hold up, while several said the housing sector was starting to rebound as mortgage rates fell.

Nonetheless, several Fed officials noted that statistical indicators pointing to the probability of a recession over the medium term had increased notably in recent months -- and Bloomberg added that economic data released since the meeting has been soft. Closely watched reports on manufacturing, services and payrolls all came in weaker than expected, though hiring was still seen as sufficient to push the U.S. jobless rate down to a half-century low of 3.5%.

In addition, Chairman Powell sounded non-committal Tuesday on the need for another cut in October, describing the economic outlook as "favorable" but threatened by risks connected to trade and slowing global growth. "We will act as appropriate to support continued growth, a strong job market, and inflation moving back to our symmetric 2% objective," he said.

Earlier this week, Powell stressed that the Fed increase in purchases was to solve "technical issues" and was not designed to stimulate the economy.

The New York Times said in its review of the minutes, that the Fed has two main tasks: promoting maximum employment and maintaining stable inflation, which it defines as 2 percent annual price gains. However, it also noted that the Fed has become increasingly divided over how to achieve those objectives because the economy's prospects have been clouded by trade and other economic uncertainties even as consumer spending and job growth have held up.

Still, the Times report said, "despite the mounting risks, a few Fed officials felt that markets were expecting too many Fed interest rate cuts, "and that it might become necessary for the committee to seek a better alignment."

The debates over the economy and trade have become the most intense of recent years and likely will continue to be both contentious and persistent and should be watched closely by producers as they continue to intensify, Washington Insider believes.

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