Washington Insider-- Friday

Dovish Fed Struggles

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

USDA Reports $1.96 Billion Paid Out Under CFAP 2

USDA's Farm Service Agency has released information on payouts made under the Coronavirus Food Assistance Program 2 (CFAP 2), reporting that $1.96 billion had been paid out as of October 6.

The total includes $1.1 billion in acreage-based payments, $543.7 million for livestock, $203.9 million for dairy, $103.8 million in payments for sales commodities and $2.8 million for eggs and broilers.

By commodity, the payouts in this initial data included $687.3 million for corn, $414 million for cattle, $254.9 million for soybeans, $203.9 million for milk and $120.4 million for hogs/pigs.

USDA's Perdue Floats Possible WTO Action On EU Farm-To-Fork Plan

USDA Secretary Sonny Perdue has continued to hammer away at the European Union (EU) farm-to-fork (F2F) plan which is aimed at promoting sustainability in agriculture production.

Perdue has been consistent in warning the F2F effort could affect global trade flows and negatively impact the ability of agriculture to feed a growing global population.

Perdue's focus has been that the F2F effort is based on “subjective matters rather than definitive health and safety matters, and reiterated those views in a press call Wednesday hosted by the U.S. State Department. Perdue said the EU has countered the plan is driven by popular sentiments and demands. But he also issued a warning that while the U.S. did not want to take such an action, he would not rule out heading to the WTO on the effort.

“I don't think we like to threaten about those kinds of things. If protectionism does come into play… then WTO courts are one avenue,” Perdue said, adding he wanted to resolve the issues through “diplomacy and the persuasion of both agricultural producers as well as European consumers.”


Washington Insider: Dovish Fed Struggles

Bloomberg says this week that Federal Reserve Chair Jerome Powell has done almost everything in his power to demonstrate his desire for higher inflation. Asked whether the Fed wants to get unemployment back down to 3.5% or below — a degree of labor market tightness that previous Fed chairs feared would set off spiraling inflation — he said, “Yes, absolutely.”

Still, Bloomberg thinks Powell's pro-inflation efforts are “not yet” working. If the financial markets were taking the chairman at his word, long-term interest rates would be “leaping” to compensate investors, Bloomberg argues.

Inflation that's chronically too low remains a perplexing challenge for central banks, which have an easier time fighting inflation that's too high. If Powell can't convince consumers, companies, and investors that the Fed can raise inflation, bad things could happen, the report says.

A Japan-like deflationary psychology could set in as households and businesses put off buying big-ticket items — whether cars or machine tools — in the expectation that prices will fall. What's more, low inflation and soft demand for loans have combined to push interest rates to the floor, which robs the Fed of its No.â??1 tool for fighting recessions.

To avoid outright deflation the European Central Bank cut its key short-term interest rate below zero in 2014. The Bank of Japan followed in 2016. Powell's Fed has resisted going subzero, but it has been the first to embrace overshooting its inflation target to compensate for periods of undershooting.

Bloomberg thinks several factors are keeping inflation undesirably low just now, especially the demand suppressing impacts of the pandemic. The year over year price change index for personal consumption expenditures was just 1.4% in August.

Meanwhile, the economic recovery is faltering as coronavirus relief programs have become less certain. In a speech on Oct. 6, Powell warned of “tragic consequences” for racial and wealth disparities if relief isn't extended.

The Fed's new inflation policy is in part an admission that the old rules no longer apply. Policymakers used to assert with confidence that an unemployment rate below 6% would lead to high inflation. Yet even when unemployment hit a low of 3.5% in February, inflation remained below the 2% target.

The August Fed policy changes are unusually dovish policies for the world's most powerful central bank and are making U.S. monetary policy “as easy as it's ever been in modern times, or even in nonmodern times,” says Padhraic Garvey, head of research for the Americas at ING Bank NV.

But will it work? David Wilcox, a former Fed official who's a senior nonresident fellow at the Peterson Institute for International Economics, calls it “a very substantial step forward.” Allison Boxer and Joachim Fels, both of Pimco, a big bond investor, are skeptical.

For the Fed, promises are easy to make but could be hard to keep, Bloomberg thinks. When it comes time to let inflation run above 2%, there are likely to be hard-to-ignore shrieks of pain from the bond market and people living on fixed incomes.

The new approach policymakers settled on recently involves more discretion than the Fed has exercised since the Greenspan era. Vagueness about the strategy likely helped Powell and Vice Chair Richard Clarida, who was in charge of the policy rethink, achieve consensus between the hawks and the doves on the FOMC. It also gives the Fed some flexibility in case of the unexpected—such as a sharp drop in oil prices that lowers inflation or a widespread crop failure that raises it.

For many, the use of “less-specific” objectives is unsatisfying. “I wish it was a little more specific,” says John Taylor, the economist at Stanford and the Hoover Institution whose own rule for setting monetary policy has informed the Fed and other central banks. One observer says, “I do hope they know what they're doing.” He says he's inclined to give Powell the benefit of the doubt: “He seems to have his head on right.”

The dream scenario for the Fed is that its messaging works, the economy strengthens, workers earn much-needed raises, consumers open their wallets, and companies are able to raise prices and get back to profitability.

There's also a darker scenario that could produce rising prices. In that one, easy fiscal and monetary policies are politically difficult to scale back despite rising inflation caused by worker shortages, trade barriers that cut off vital imports, and other factors. In March, Charles Goodhart of the London School of Economics and Manoj Pradhan of Talking Heads Economics wrote “The coronavirus pandemic, and the supply shock that it has induced, will mark the dividing line between the deflationary forces of the last 30 to 40 years, and the resurgent inflation of the next two decades.”

Resurgent? Perhaps. “It will take some time,” Powell said at the Sept. 16 press conference. “It's a slow process, but there is a process there.” Spoken like a thoroughly modern, prudently irresponsible central banker, Bloomberg said.

So, we will see. Efforts to manage the money supply are likely to be more difficult and controversial than at any time in recent years, and should be watched closely by producers as the season advances, Washington Insider believes.

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