Washington Insider -- Tuesday

President and Fed Continue Monetary Policy Fight

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

Positive Views Continue On US-China Trade Front

Commerce Secretary Wilbur Ross said he is optimistic the U.S. would reach a “Phase One” trade deal with China this month and said licenses would be coming “very shortly” for American companies to sell components to Huawei Technologies, adding that the government received 260 requests.

“You will not have a deal on anything until you have a deal on everything,” Ross told the Financial Times in Bangkok. “But we are quite optimistic that the remaining issues for the phase one can be closed out.”

China also gave a positive readout on the situation. U.S. and Chinese trade officials were able to reach a “consensus on principles,” according to a statement released Friday by China’s Commerce Department. The negotiators moved on to begin discussing Phase Two, the Chinese said.

As for a location for a signing of the agreement, Ross said Iowa, Alaska, Hawaii and locations in China are all possible places for President Donald Trump and Chinese President Xi Jinping to sign the deal after the cancellation of this month’s Asia-Pacific Economic Cooperation (APEC) summit in Chile due to unrest in the country.

President Trump also mentioned the possibility of Iowa for the meeting in remarks on Friday — Trump reportedly wants to make sure the signing takes place in the U.S.

Farmer Borrowing Costs Down

Commodity loans disbursed in November by the Commodity Credit Corporation (CCC) will have a 2.625% interest rate, down from 2.750% in October. This marks the fifth straight month that the interest rate on commodity loans has declined.

The interest rate in effect for November is a full percentage point below the level in place in November 2018 when it was 3.625%.

This means lower borrowing costs for farmers opting to utilize the nonrecourse marketing assistance loan (MAL) program for their 2019 production.

In USDA’s August farm income update, they noted that interest rates were a key farm expense area that had risen.

Washington Insider: President and Fed Continue Monetary Policy Fight

There is a modest amount of optimism about a possible U.S.-China trade deal just now, in spite of the usual comments about making sure the agreement treats both sides fairly, among other things. However, there is overall policy friction over the President’s unhappiness about monetary policy. The Fed is taking pains to say that it is pretty well satisfied with the current key rates even though President Trump isn’t.

In a series of appearances last week, central bank officials hammered home the message that policy is “on hold” after three cuts in interest rates this year. “We have a favorable outlook for the economy,” Fed Vice Chairman Richard Clarida told Bloomberg on Friday. “We think the economy is in a good place, we think monetary policy is in a good place.”

Bloomberg argues that “faced with an election a year from now, Trump certainly wouldn’t disagree with the former assessment — and, he hailed “a blowout jobs number” following the report that payrolls grew by a bigger-than-expected 128,000 in October in spite of the since-ended General Motors Co. strike.

But that doesn’t mean that he’s happy with the job being done by Fed Chairman Jerome Powell and his colleagues, Bloomberg thinks.

“People are VERY disappointed in Jay Powell and the Federal Reserve,” Trump tweeted last week after the central bank lowered rates by a quarter percentage point. “The Fed has called it wrong from the beginning, too fast, too slow.”

Trump economic adviser Larry Kudlow was more restrained. “Monetary policy fortunately has finally turned around,” said Kudlow, who is director of the White House’s National Economic Council. “We’ve gone from extreme tightness to a somewhat more accommodative position.”

After raising rates four times in 2018, the Fed has reduced them this year to shelter the economy from slowing growth overseas and uncertainties stemming from Trump’s trade policies, particularly with regard to China.

Fed Vice Chairman for Supervision Randal Quarles commented last week that the current stance of monetary policy was “likely to remain appropriate” as long as the economy grows moderately, the jobs market stays strong and inflation is near the Fed’s 2% goal.

Economists at JPMorgan Chase & Co. and Deutsche Bank AG were among those who declared last week that the Fed is now on hold.

But moderate growth — generally seen by economists as equivalent to about 2% — might not be enough for an administration that has promised increases of 3% or more.

After heating up last year in response to the administration’s tax cuts, the economy has cooled in 2019 as trade tensions and sluggish global growth have dampened business confidence.

Since Trump took office in January 2017, gross domestic product has risen at an average annual clip of 2.6%, a bit faster than the 2.4% rate in President Barack Obama’s second term, Bloomberg said.

Speaking Friday in Washington, San Francisco Fed President Mary Daly affirmed the central bank’s independence. “We don’t think about politics,” she told students at Howard University.

Morgan Stanley Chief U.S. Economist Ellen Zentner defended the central bank against Trump’s attacks. “If their job is to extend the expansion for as long as possible, it also includes not allowing the economy to overheat, which can stop expansions short,” she told Bloomberg.

Fed policy makers generally played up the performance of the U.S. economy and the jobs market in separate appearances last week. “The economy is strong,” New York Fed President John Williams declared at Rutgers University in New Jersey.

He said he sees “people who’ve been out of the labor force for maybe years, or much of their life, now getting job training, getting back into the labor force.”

Dallas Fed President Robert Kaplan agreed with that upbeat assessment, telling reporters in Houston that the U.S. was “at or past full employment.”

At 3.6% in October, the jobless rate is hovering near a 50-year low and is below the 4.2% rate that Fed officials reckon is sustainable in the long-run, according to the median projection of policy makers released in September.

Kaplan said the Fed had acted in “a modest, restrained and limited way” to support the economy by cutting rates this year.

“We want to give it some time to work through the economy and to see how events unfold,” he said, adding, “I’d want to be patient here, at this point.”

That approach isn’t seconded by the President, as his tweet last week attacking the Fed made clear.

So, we will see. There are many uncertainties that could affect both domestic and foreign markets — and while inflation is not one of them, at least, not at the moment, that could be a modestly strong talking point for the administration as long as a reasonable likelihood remains for significant easing of the trade tensions with China and as long as global market tensions do not intensify. These are all key issues that should be watched closely by producers as the season advances, Washington Insider believes.

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