Washington Insider -- Thursday

Coronavirus Pressure on the Fed

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

Report says EPA to Extend Court Ruling on RFS Waivers Nationwide

The Trump administration has decided to limit the small refinery exemptions (SREs) under the Renewable Fuel Standard (RFS) based on a January court ruling that EPA overstepped its bounds in granting three SREs for the 2016 compliance year.

EPA is now expected to apply the ruling by the 10th Circuit Court of Appeals nationwide, Bloomberg reported, citing sources familiar with the internal discussions. This would mean that only a few small refiners would be granted the exemptions as the court ruling indicated that EPA erred in granting the waivers as they were not extensions of waivers that had been granted in 2010.

EPA data showed a sizable increase in the level of SRES granted starting with the 2016 compliance year. EPA data posted showed that the agency approved eight out of the 16 SREs sought for the 2013 compliance year, eight of 13 sought for the 2014 compliance year and seven of 14 sought for the 2015 compliance year.

USDA Sees Continued Tame Grocery Store Food Price Inflation Ahead

Food at home (grocery store) prices are seen increasing from 0.5% to 1.5% in 2020, in line with the 2019 increase of 0.9% and a forecast that would continue the trend of grocery store prices rising less than one percent that has been in place since 2016, according to USDA. 2015 was the last time that grocery prices rose more than 1% with an increase of 1.2%.

Still, the result remains well below the 20-year average of 2%.

USDA also recalculated the 20-year averages for food items to include the 2019 data, with nine categories seeing a decrease in their averages (beef and veal, fish and seafood, eggs, dairy products, fats and oils, fruits and vegetables, fresh fruits and vegetables, fresh fruits, and other foods) while four saw increases (food away from home, pork, fresh vegetables, and sugars and sweets).

Food away from home (restaurant) prices have continued to see strong increases as they contain several other cost factors not included in grocery store prices such labor and rental prices with food making up only a small percentage of total restaurant costs.

Washington Insider: Coronavirus Pressure on the Fed

The key issue in the media this week is the spread of the coronavirus and its impact.

The question of what the central banks and other will do in response is also “a dire challenge,” The Hill says this week. Pressure is building on the Fed to cut interest rates as it struggles to both keep the economy stable and defend its independence from the President’s pressure.

The Fed earlier indicated a desire to keep interest rates steady this election year after navigating both a trade war and a global downturn in 2019, The Hill says. But, even as bank officials say it is too soon to react to the outbreak, “that stance is being put to the test.”

U.S. financial markets are now betting on an interest rate cut after this week’s Wall Street losses obliterated six weeks of stock gains as coronavirus fears intensified. Tuesday’s 3.2% plunge followed a Monday loss of 1,031 points, or 3.6%, its worst day since February 2018.

The stretch of losses could extend further as worries about the coronavirus fester continue the Centers for Disease Control and Prevention warned Tuesday. “It’s not a question of if this will happen but when — and how many people in this country will have severe illnesses,” said Nancy Messonnier, a top CDC official. “Disruption to everyday life might be severe.”

The warning from federal health officials spurred further alarm among investors as expectations of a Fed rate cut in March rose to 27.7% Tuesday from just 11.1% a week ago, according to investment firm CME Group.

Fed officials have been reluctant to cut rates further after slashing borrowing costs three times last year, bringing the central bank’s baseline range to just 1.5% to 1.75%. With rates so close to an effective rate of zero percent, economists fear that a minor reduction would do little to handle a global supply shortfall and cost the Fed crucial room to cut rates in the event of a crisis.

“They won’t want to cut rates too soon and then immediately see the pace of new infections quickly diminish and an inventory correction occur suddenly, wrote University of Oregon economic professor Tim Duy in a Tuesday analysis.

Several members of the Federal Open Markets Committee, which sets Fed interest rates, have spoken out against cutting over the past four days. The Fed held rates steady at its January meeting and had expected to maintain that stance.

Fed Vice Chairman Richard Clarida said in a Tuesday speech that “it is still too soon” to gauge the potential economic impact the outbreak could have on the U.S., adding that the Fed will “respond accordingly” to “a material reassessment of our outlook.”

Clarida’s comments echoed similar remarks from several Federal Reserve Bank presidents — including Loretta Mester of Cleveland, Raphael Bostic of Atlanta and James Bullard of St. Louis — who played down the need for a March rate cut over the past few days.

But the economic toll of a prolonged outbreak also would likely raise the President’s ire as he seeks reelection on the strength of the economy. He and his top officials who regularly pressure the Fed to cut rates amid stock downturns have tried to soothe the fears of a pandemic driving Wall Street’s losses.

“We have very few people with it,” the President told reporters at a press conference in New Delhi on Tuesday, saying it was “well under control” in the U.S. “The people are getting better. They’re all getting better,” Other officials agreed despite warnings from CDC officials.

Economists at Goldman Sachs warned last week that the coronavirus could cause a stock market correction, which is considered a 10% decline from the most recent peak, before the weekend’s sharp increase in infections.

The President often ties the success of his economic agenda to the rise of the stock market while blaming the Fed for even minor downturns. The president has piled unprecedented pressure on the Fed and its chairman, Jerome Powell, to pump a steady economy with crisis-level stimulus.

“When Jerome Powell started his testimony recently the Dow was up 125, & heading higher. As he spoke it drifted steadily downward, as usual. Germany & other countries get paid to borrow money. We are more prime, but the Fed Rate is too high, Dollar tough on exports,” the President tweeted earlier as Powell testified before a House committee.

The Fed has largely ignored the President’s pressure and took great pains to distance its three 2019 rate cuts from any political considerations. But the President’s pressure is likely to intensify if the markets continue their weakness, The Hill said.

“A Fed rate cut will bolster financial conditions but it will take months to filter through to the real economy,” said Joe Brusuelas, chief economist at U.S. tax and audit firm RSM on Tuesday.

Brusuelas warned that if the coronavirus outbreak slumps the U.S. economy, it could take a special lending facility from the Fed and fiscal action from Congress to counter the damage.

“The agencies that could help like the [Small Business Administration] need to be mobilized now and additional trade finance will need to be considered,” he said.

So, we will see. The situation appears to be highly complex and challenging, and there is the potential for destabilization if inappropriate policies are applied. It certainly is one producers should watch closely as it continues, Washington Insider believes.

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