Washington Insider -- Monday

What's Ahead for the Economy

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

EPA Addresses Court Ruling On RFS Exemptions

EPA has finally issued comments relative to the situation with small refinery exemptions (SREs) in the wake of the 10th Circuit Court ruling, which invalidated three SREs issued for the 2016 compliance year.

“EPA does not intend to unilaterally revisit or rescind any previously granted small refinery exemptions issued for prior compliance years,” the agency said as it announced other fuel-related actions. “As noted in the temporary policy on COVID-19 Implications for EPA's Enforcement and Assurance Program, issued yesterday (March 26), EPA is focused on protecting our employees and ensuring continued protection of public health and the environment from acute or imminent threats during the COVID-19 pandemic.”

Given that stance, EPA said that investigating and initiating enforcement actions against prior SRE recipients “is a low priority for the agency.”

EPA further said it “intends to develop an appropriate implementation and enforcement response to the 10th Circuit’s decision in RFA v. EPA once appeals have been resolved and the court’s mandate has been issued.”

On the 2019 compliance deadline of March 31 for obligated parties to demonstrate compliance with the Renewable Fuel Standard (RFS), EPA said, “In a forthcoming action, EPA intends to extend the RFS compliance date for small refineries to provide them with additional flexibility.”

State Department Shifts H-2 Visa Process

After having suspended visa processing at embassies March 20, the State Department announced it is still continuing to process returning H-2 visas and will now allow consulates to waive in-person H-2 interviews on first-time and returning H-2 applicants “that have not apparent ineligibility or potential eligibility.”

The interview waiver can also apply to those whose previous visas expired within the last 48 hours and did not require a waiver of ineligibility to the last time they applied if they are applying for the same classification as their prior visa.

“We anticipate the vast majority of otherwise-qualified H-2 applicants will now be adjudicated without an interview,” the State Department said.

USDA Secretary Sonny Perdue welcomed the move relative to H-2A visa applicants that work in throughout the ag sector.

Washington Insider: What’s Ahead for the Economy

The national media certainly is uncertain about the economic future these days. For example, the New York Times emphasized the “might of the Federal Reserve” is on display, but noted that it is now dealing with a virus, which seems almost impossible to understand.

The report began with a look at recent trends in the equities markets and said, “After weeks of dropping like a stone, the stock market began to catapult upward” last week. By the market close on Thursday, the Dow had risen more than 20% from its nadir on Monday — enough, in technical terms, to qualify as a bull market, NYT said.

The article allows that it is largely “pointless” to try to explain moment-to-moment financial market moves since they “usually amount to little more than random noise.” Still, it thinks there are exceptions and “this may be one of those times.”

Among the myriad, and often spurious, explanations for the market’s abrupt change of mood, the NYT found an explanation: the Fed. And it found a financial expert who agreed. He is Edward Yardeni, an independent Wall Street economist who has published a new and exquisitely timed book.

Yardeni says that “The Fed decided it had to really shock and awe the markets and it did the job. You can see the results yourself. He notes that the Fed announced that it would, essentially, take whatever actions were needed to restore stability in the markets, as well as the economy. Referring to the unorthodox monetary policies that the Fed put into effect to combat the global financial crisis of 2007-08, he said the new policy amounted to “quantitative easing to infinity and beyond.”

He said that the Fed’s new policies are so large, and operate on so many fronts, that they are difficult even to catalog. In addition to lowering short-term interest rates to nearly zero, it will buy Treasury securities, government agency securities and corporate bonds. Beyond that, the newly enacted fiscal stimulus package will enable it to increase its already immense firepower by as much as $4 trillion.

An extremely confident Jerome Powell, the Fed chair, sent out a clear message on the “Today” show on Thursday, saying: “When it comes to this lending, we’re not going to run out of ammunition.”

The Times interpreted that statement as a challenge—"fight the Fed and you will face a virtually limitless financial arsenal.” No wonder traders were stunned into submission, it said. In the face of the Fed’s intention to bolster the markets, they stopped dumping stocks and began to gobble them up.

Yet any central bank’s ability to turn an entire economy around is severely limited under any circumstances, the Times cautioned. In the face of a pandemic and what increasingly looks like a severe global recession, even the Fed can provide only partial remedies.

Still, money is flowing into credit markets, which had threatened to seize up as they did in the last financial crisis. The pricing of exchange-traded bond funds—mutual funds that trade all day like stocks—has returned to a semblance of normality, thanks to the Fed’s intervention in the bond market. And riskier assets like stocks have received a therapeutic jolt, now that the Fed has made it absolutely clear that it will do whatever it takes.

In addition, Yardeni pointed out that double-digit gains in stock prices over just a few days may already be enough to have fundamentally shifted traders’ approach to stocks. The Fed acted, and the stock market “just took off,” he said. He added that it was quite possible that the “market has already reached a bottom.”

However, that is a fundamental question for investors, the Times cautions, and says it finds that likelihood doubtful and that it is unwilling to assume that the worst is over in the markets, because there may well be “terrible events” just ahead.”

On Thursday morning, for example, the Labor Department announced that 3.28 million Americans had filed for unemployment benefits in a single week — up from the previous record by a factor of nearly five. And next week’s number could be worse.

Also last week’s reports indicate that the pandemic is still in its early stages and its severity is only beginning to be measured. Economists at JPMorgan Chase now predict that the decline in gross domestic product in the United States will be more than 10% in the current quarter and more than 25% from April through June. How steep the drop in GDP will actually be is anybody’s guess, but it will be certainly be bad.

Whether the stock market, which gave up ground on Friday, can rise in the face of such calamities seems highly questionable, while the performance of the federal government has so far been less than inspiring.

“If we don’t get the pandemic under control,” Yardeni said, “I don’t know what the Fed is going to do about it.” I hope we don’t have to find out. The Fed’s intervention has been comforting, but awesome as it may be, the Fed can’t beat the coronavirus.

So, we will see. The effectiveness of the new efforts to “level” the impacts of the pandemic are extremely important and the combined health and economic policies should be watched very closely by producers as their impacts emerge Washington Insider believes.

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