Washington Insider-- Tuesday

Complicated Future for Central Banks

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

USDA Reverses Course On Hemp Guidance

USDA's Farm Service Agency last week issued a notice to state and county offices on making direct and guaranteed loans to hemp producers for the 2021 growing season and then abruptly pulled that notice back.

The original notice indicated that hemp growers could no longer produce the crop under the pilot program that was part of the 2014 Farm Bill.

However, the agency quickly withdrew that guidance, noting that “the 'Continuing Appropriations Act, 2021 and Other Extensions Act' authorizes operations to continue to produce hemp under approved 2014 Farm Bill Pilot Programs until September 30, 2021.”

Given the extension in the continuing resolution, FSA said, “Additional guidance on making direct and guaranteed loans to hemp producers for the 2021 crop year is forthcoming.”

Groups Push Meat Labeling Framework For Cell-Based Meat

The North American Meat Institute and the Alliance for Meat, Poultry, and Seafood Innovation are sending a joint letter to USDA and FDA food safety officials on the topic of cell-based meat, urging the agencies to support “a labeling framework that fosters transparency, consumer confidence, and a level playing field while also aligning with longstanding law and policy.”

The groups said mandatory labeling requirements should also be informed by “more information and supporting data on finished product characteristics for cell-based/cultured meat and poultry products, particularly those that may require labeling.”

The groups urged USDA's Food Safety and Inspection Service issue an Advanced Notice of Proposed Rulemaking to collect the information.


Washington Insider: Complicated Future for Central Banks

Bloomberg is cautioning now that the U.S. Federal Reserve and other central banks will eventually discover that “breaking up isn't easy” after partnering with their governments and the financial markets to avert a pandemic-driven depression. Investors and lawmakers enamored with cheap money “may well balk when monetary authorities try to throttle back their quantitative easing and other stimulus measures,” the report said.

“They are increasingly on what I call a no-exit paradigm,” Allianz SE chief economic adviser and Bloomberg Opinion columnist Mohamed El-Erian, told a group of experts included in a panel discussion last week.

The problem isn't pressing – and in fact is probably one central bankers would be glad to have if it meant their economies were strong. Instead, faced with slowing global growth and resurgent infections, the focus of policy makers at last week's all-virtual International Monetary Fund and World Bank meetings was on more support for the world economy, not less. Central banks are pulling out the stops to do all they can, boosting financial markets with massive asset purchases and pushing government borrowing costs to record lows,” Bloomberg said.

Fed Chairman Jerome Powell has repeatedly pressed for more aid to support the economy until it's clearly out of the woods. “The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side,” he told business economists on Oct. 6.

However, he thinks that “the trouble may start after a virus vaccine is approved and distributed” and the U.S. and world economies begin to return to normal. If the Fed and other central banks are constrained from scaling back emergency stimulus at that point, the continued flood of liquidity could spur asset bubbles and even too-rapid inflation, he said.

Rebecca Patterson, director of investment research at Bridgewater Associates, said she saw some merit to arguments that the U.S. ultimately will see faster inflation because of continued aggressive fiscal stimulus. “It's something investors really haven't had to think about for the last few decades,” she told an Oct. 13 Council on Foreign Relations briefing. “Whether we get it or not, preparing for that risk scenario is pretty important.”

Patterson said that economic policy “has entered a new paradigm, with independent central banks and governments working closely together to fight the pandemic.” Monetary policy makers are buying up government bonds while fiscal policy practitioners are issuing more of them to finance mammoth budget deficits. “Fiscal has become the dominant driver,” Patterson said.

The relationship between the central banks and their governments is “sort of a honeymoon situation because their interests are aligned,” former European Central Bank chief economist Peter Praet said. “There is no inflation, so the central banks ask the fiscal authority to spend more to support aggregate demand,” he told a later panel discussion hosted by the Institute of International Finance. “But when their interests start to diverge, that's a very delicate moment.”

The debt deluge may have other consequences. The Treasury market is now so large that that it may not be able to function smoothly on its own during times of stress, according to Fed Vice Chair for Supervision Randal Quarles. He told a virtual discussion organized by the Hoover Institution on Oct. 14 that it was an “open question” whether the Fed would have to keep buying Treasuries to aid the working of the market. The central bank is currently purchasing about $80 billion of Treasuries a month.

Central bank leaders from Europe, Japan and the UK stressed the importance of maintaining the independence of their institutions at a virtual international banking seminar on Sunday.

“We have to steer clear of what would be regarded in popular parlance as fiscal dominance,” European Central Bank President Christine Lagarde said.

Andrew Bailey, governor of the Bank of England, said the independence of central banks hasn't been eroded by their coordination with governments to help economies through the coronavirus crisis this year.

The bond market is underestimating how strongly the U.S. economy will rebound, and that may lead to a “mini taper tantrum” next year, according to John Herrmann at MUFG Securities Americas.

El-Erian said that the U.S. central bank has “conditioned the market to such an extent that every time the Fed tries to step back, the market forces them back in” by selling off and tightening financial conditions.

Former Bank of England policy maker Paul Tucker agreed that the financial markets have come to expect periodic support from central banks after years in which monetary policy makers effectively delivered just that.

“I wait, longing for a central banker to do for financial stability what Paul Volcker did for inflation, which is to break that psychology that you, the capitalist markets, are actually utterly dependent on the Federal Reserve and other central banks, propping up prices come what may,” Tucker said.

So, we will see. Clearly, the institutional adjustment to more nearly normal markets will mean hazards for many current participants – changes that affect large stakeholders in the U.S. and global economies. These are efforts producers should watch very closely as they emerge, Washington Insider believes.

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