Washington Insider -- Monday

The Impacts of the Coronavirus Scrutinized

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

USDA Report Details China Trade Deal Impact on US Trade Forecasts

The Office of the Chief Economist released a report, “Agricultural Provisions of The U.S.-China Economic and Trade Agreement and USDA Trade Forecasts,” outlining how the Phase One trade agreement will – and will not – affect USDA trade forecasts for the monthly WASDE and other monthly, quarterly and annual reports.

While some have focused on the statement referenced more than once in the document that “commodity-specific commitments are not publicly available and are therefore not considered in the published forecasts,” it is important to note that the report also states, “Beginning in February 2020, USDA trade projections for 2019/20 (and Fiscal Year 2020) will fully consider all publicly available information on the Agreement, as well as any new market or policy developments that would affect those forecasts.”

As for the forecasts released at USDA’s Outlook Forum near Washington, DC, Feb. 20-21, and the first official 2020/21 forecasts in the May WASDE, the report states, “Both the initial forecasts released in February and the official May WASDE 2020/21 forecasts will incorporate the Agreement into the underlying analysis, along with all other relevant market and policy variables.”

Importantly, the report also notes, “As more information and data become available regarding the timing, volume and content of China’s commodity purchases, USDA commodity forecasts will be updated to reflect that new information.” This indicates that USDA analysts are being given no additional information beyond what has already been made public. But it also means they will be incorporating the information is available in their forecasts starting with the February WASDE report due on February 11.

Stabenow Again Hits USDA Over MFP ‘Inequities’

Senate Agriculture ranking member Debbie Stabenow, D-Mich., released an updated report alleging inequities in payments from USDA's Market Facilitation Program (MFP). She said the data show a bias in payments towards large and Southern farms on a per-acre basis. “As farmers continue to face tough times, the Trump administration has failed to correct the serious inequities within their flawed trade assistance program,” Stabenow said in a statement. Stabenow argued MFP’s “relaxed payment and eligibility limits” have benefitted large farms and foreign companies at the expense of small and beginning farmers.

A USDA spokesperson disputed the findings, telling Politico “farms with less than 100 acres received an average of $55.90 per acre, while farms with more than 2,500 acres received an average $47.51 per acre.” The spokesperson also emphasized that MFP payments are made based on trade damage, not other factors.

Washington Insider: The Impacts of the Coronavirus Scrutinized

The urban press is laser-focused on the rapidly spreading impacts of the coronavirus just now. Fed chair Jerome Powell is scheduled to appear before a couple of congressional committees this week and certainly will face strong scrutiny regarding developments and plans for key economic policies.

As might be expected, Powell is confessing that he finds it “very hard” to understand China’s economy--and that the disease outbreak “has made that exponentially more difficult.”

Certainly, these issues are seen as “too important to ignore,” Bloomberg thinks because of the sheer size of the economy—so that “any hit to its growth from the epidemic will have a knock-on impact for the rest of the world and the US,” and much of the world is worried.

The effects of the coronavirus in China are generating a “prominent new risk to the outlook,” the U.S. central bank wrote in its semi-annual report to Congress released on Friday.

Just how big that risk is--and the expected Fed response—certainly will key topics as Chairman Powell kicks off two days of Congressional testimony before the House Financial Services Committee, and then to the Senate Banking panel.

Lawmakers also will likely press Powell for the rationale behind the big run-up in the Fed’s balance sheet that’s occurred since September’s turmoil in the money markets.

Bloomberg also notes that the testimony comes on the heels of the impeachment fight and ahead of November elections so the hearings—like almost everything else—almost certainly will be “politically contentious” as lawmakers from both parties pepper Powell with questions.

“He is going to have his Kevlar on,” said Ward McCarthy, chief financial economist at Jefferies LLC. “All of the questions will have some political connotations.”

Ahead of the hearings, traders in the federal funds futures market are betting that Powell and his colleagues will respond to the virus with a cut in interest rates later this year.

Still, given all the unknowns involved, Fed watchers say Powell is unlikely to be that clear about the Fed’s intentions. But he’s just as unlikely to dismiss the threat and rule out any response.

“There’s little upside to trying to sound too confident,” said former Fed researcher Michael Feroli, who is now chief U.S. economist at JPMorgan Chase & Co. “At least when I was there, there weren’t any virologists on the board.”

Bloomberg also notes that its own economists think that “the underlying hiring trend is robust, providing a sturdy foundation for domestic growth,” although this is due to be challenged in the relatively near term by weak global growth in general and coronavirus supply-chain disruptions in particular.

In the meantime, private sector economists have started to shave their estimates of U.S. growth due to the coronavirus. Feroli cut his first-quarter forecast to 1%, though he expects activity to bounce back in the second quarter.

Oxford Economics is more pessimistic. It reduced its first-quarter growth prediction to 0.6% from 1% with some spillover into the second quarter. At the same time, the virus outbreak occurs against a backdrop of what is mostly a healthy U.S. economy. U.S. employers boosted payrolls by a higher-than-expected 225,000 in January as wage gains also rebounded.

The global outlook also appears a bit brighter now thanks in part to the US-China phase one trade deal and fading of fears of a disruptive, no-deal Brexit. What’s more, the turbulence in the money markets has also subsided, thanks to hundreds of billions of dollars the Fed pumped into the financial system.

So, Powell will have a lot to discuss. In a Feb. 6 letter Democrat senators pressed him for an explanation of what lay behind last year’s agitation in the money markets and the Fed’s response. The lawmakers, including presidential candidate Elizabeth Warren, raised questions about whether the banks had gamed the market in hopes of winning some regulatory relief.

Powell, for his part, has depicted the money market interventions as a success.

He also sounded satisfied with the stance of monetary policy, after three interest rate cuts last year. And he’s suggested that he’s likely to stay that way unless there’s a material change to the outlook for the U.S. economy.

So, we will see. Whether the coronavirus will eventually force such a reassessment is unclear at this point even as it broadened “the set of possible outcomes,” said Nathan Sheets, a former Fed official who is now chief economist for PGIM Fixed Income. And, it means that producers should watch the upcoming monetary debates especially closely as they emerge, Washington Insider believes.

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