Washington Insider -- Wednesday

The Fed and Whatever It Takes

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

FSIS Offers Temporary Labeling Instructions on COVID-19 Shifts

The shift of products from food service to retail establishments as the COVID-19 situation is disrupting supply chains has prompted USDA’s Food Safety and Inspection Service (FSIS) to issue some temporary guidelines that will allow the product shifts to take place.

FSIS emphasized that the labeling flexibilities “apply to product that has already been produced” and any products currently being produced are still “expected to meet all requirements” for labeling.

The action by FSIS addresses the potential lack of nutrition labeling for food intended for distribution to hotels, restaurants, or similar institutions (HRI) that may be repackaged and resold to retail consumers.

Under the flexibilities announced by FSIS, “product produced at a federal establishment typically intended for distribution to [HRI] will have modified labels applied by the federal establishment so that the products can now be sold at retail. The label would be required to bear all required features. FSIS will not object to the use of labels without nutrition labeling,” the agency said, even if the establishment does not meet an exemption under law, “provided the labels do not bear any nutrition claims.”

Products in protective coverings are eligible for the temporary flexibilities announced by FSIS for the next 60 days starting on March 23, 2020, the service said.

CCC Funding Key in COVID-19 Aid Plans

Funding for the Commodity Credit Corporation (CCC) and potentially increasing the USDA’s borrowing authority for CCC remains an issue in the efforts to put together a third COVID-19 aid package.

The proposal that has been in the initial Senate plan would refund the CCC back to $30 billion and add $20 billion in additional borrowing authority.

That is being eyed as a way for USDA to address impacts that have been seen in the ag industry from the COVID-19 situation, particularly for cattle producers.

The COVID aid plan generated by House Democrats lacks the CCC refunding and increase in the borrowing authority.

Washington Insider: The Fed and Whatever It Takes

As of mid-day Tuesday, there was no firm deal yet on the expected federal economic bailout. However, there was a modest amount of information regarding efforts by the central bank to keep money flowing in the economy.

The Fed announcement on Monday had “lots of bureaucratic jargon and an alphabet soup of acronyms,” the Times said. However, at its core, “it was making a simple promise—to use the full range of tools to support households, businesses and the U.S. economy overall.”

Most of the efforts the central bank described fall under the broad category of “buying debt,” the Times said — policies the Fed already has in motion through purchases of vast quantities of Treasury bonds — debt issued by the federal government — and mortgage debt backed by government agencies like Fannie Mae and Freddie Mac.

Still, this week’s announcement went further, promising to keep buying “in the amounts needed to support smooth market functioning.” It also expanded programs that will support debt issued by companies, state and local governments, and other entities (though it won’t buy municipal debt directly).

The basic problem the Fed is trying to solve is that financial markets—particularly the bond market—have nearly frozen up in recent days. By promising to buy debt, the Fed is trying to get markets working again.

The report identifies two categories of American businesses--companies like airlines, hotel chains and cruise ship operators, that have seen their revenue more or less wiped out by the pandemic. Congress might step in to bail some of those companies out but there isn’t much that the Fed can do for them.

Instead, the Fed will focus on businesses that are basically healthy but are threatened by the freeze-up in financial markets. Some have been insulated from the outbreak’s effects but rely on debt as part of their normal operations. Others have lost business because of the virus but could survive if they could borrow to cover their expenses.

“If these corporations don’t have financing or they’re losing their access to credit, it means they’re going to have to close their doors and lay off workers,” said Michelle Meyer, chief U.S. economist for Bank of America Merrill Lynch. Those impacts make the recession spirals deeper and more prolonged.”

The Times noted that “ordinarily, the Fed fights an economic slowdown by lowering interest rates.” But ultralow interest rates don’t do any good if no one will lend money, or if lenders demand a huge premium. That’s what was starting to happen in recent days. Julia Coronado, president of MacroPolicy Perspectives, an economic consultancy said. “If corporations can’t get cash and mortgage markets aren’t functioning, your low rates don’t translate to households and businesses.”

By buying up government bonds and other safe assets, the Fed is trying to give investors sufficient confidence to put their money back into the bond market, which in turn should allow its interest-rate policies to work as intended.

A lot of what the Fed is doing is taken from the 2008-9 playbook used by Chairman Ben Bernanke. The Fed bought Treasury notes and mortgage bonds then, though in the past it has always put a dollar figure on its bond-buying programs. It took the extreme uncertainty of the current moment to push the Fed to pledge open-ended stimulus, the Times said. The central bank is also reviving several other programs that made their debut during the last crisis.

But policymakers are also taking novel steps. Most important, the Fed will effectively lend money directly to large corporations, something it has never done before. The central bank framed the program as “bridge financing” to help otherwise healthy companies keep their doors open and their workers employed during a period of disruption.

The Times notes that sales have abruptly dried up for restaurants, bars, independent retailers and other small businesses, and few have the savings to survive more than a few weeks without revenue. Moreover, small businesses can’t sell stock or issue debt to raise the cash to keep going. So, the Fed said on Monday that it would establish the Main Street Business Lending Program to encourage lending to small and medium-size businesses.

The Fed released few details, but said that it expects to soon. Economists said the move looked at least partly like an effort by the Fed to reassure the public that it wasn’t favoring big businesses over small ones. “I think the Fed is well aware of the optics and the messaging,” Coronado said. “It’s not always clear to people that buying billions in mortgage securities helps them, even though it does.”

Earlier, the Fed, along with other financial regulators announced new steps intended to encourage banks and other lenders to cut borrowers some slack during the pandemic. The regulators basically said to go ahead and modify loans to help businesses survive. “They will not criticize institutions for doing so in a safe and sound manner.”

In addition, there is a consensus among economists that until the outbreak is brought under control, both economic and monetary policy offer limited tools for government intervention — uncertainties that will continue to haunt policy makers and which should be watched closely by producers and others as the season advances, Washington Insider believes.

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