Washington Insider-- Friday

Holding Fast to Strong Growth Fed Policy

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

Vilsack Signals USDA Farm Program Design May Be Creating Inequities

The design of U.S. farm programs to link benefits for the safety net programs to production could be creating racial inequities, USDA Secretary Tom Vilsack said at a nutrition forum Wednesday.

Programs based on the level of production could leave out smaller or socially disadvantaged farmers, Vilsack said. “The problem is when you basically compensate on production, the person who's producing more, benefits more,” Vilsack remarked. “So what does that mean? It means the gap widens.”

He said an equality commission established at USDA will take a look at all programs and how they are designed and enacted. He labeled it “perfectly understandable” that farm programs focus on production “because that's the way it's always been.” But in a climate of heightened sensitivity on discrimination and equity, Vilsack said it makes sense to focus on broader equity impacts, not just “specific acts of discrimination.”

It is not clear what areas of U.S. farm programs that the USDA review will focus on, but no doubt lawmakers who have formulated U.S. farm policy will be tracking the USDA effort closely, likely paying close attention to making sure the USDA attention is on how the programs are enacted as opposed to the underlying legislation that creates the programs.

House Republicans Vote By Secret Ballot To Support Earmarks

House Republicans passed a resolution during their conference meeting on Wednesday in support of restoring earmarks, which allows members to secure federal funding for specific projects.

The caucus voted 102-84 as Democrats gear up to revive the practice, which allows members to secure federal funding for specific projects.

Opponents of the GOP move say the vote tally would have been far different had it not been by secret ballot. Both parties banned earmarks in 2011 after years of them being associated with wasteful projects and corruption.

Advocates say new transparency rules will help address those issues and encourage the kind of deal-making essential to bipartisan agreements. Earmarks are being seen by some Democrats as a way to potentially bring Republican support for a major infrastructure effort.

Washington Insider: Holding Fast to Strong Growth Fed Policy

The New York Times is reporting this week that one of Federal Reserve Chairman Jerome Powell's big tasks in the coming months will be to convince the financial world he means what he says about allowing more than usual inflation.

He was asked at a news conference Wednesday whether — in light of forecast that the economy would recover quickly — was it time to “start talking about talking about” slowing the central bank's purchases of $80 billion in bonds each month.

He responded with a “half-laugh,” the Times said, before answering, “Not yet.”

His dismissiveness of the idea that the Fed would even consider slowing its efforts to strengthen the economy was one of many chances he took in last week's session to convey one simple message: The central bank will not waver in its aggressive efforts to encourage growth until the economy is truly and unquestionably back to health.

It almost surely won't be the last time he faces questions that second-guess that resolve, the Times thinks.

If the economy evolves as Powell and most private forecasters expect, a veritable boom will be underway later this year. As a result, he and his colleagues at the Fed will face a continuing test of their willingness to follow through on the approach they unanimously agreed to last summer. That new policy framework ended an era in which the Fed pre-emptively raised interest rates because falling unemployment risked future inflation.

Powell's job on Wednesday was to persuade financial markets and everyone who makes economic decisions that the Fed was serious about this plan and that it won't be swayed by all the things that, based on its history, might cause an increase in interest rates and choke off the expansion prematurely.

If prices for certain goods and services were to surge as the economy comes back, it would, in this view, be a one-time bulge rather than a continuing rise in inflation to which the Fed might need to respond. The central bank's officials now project 2.4% inflation this year, overshooting their 2% target, with a projected return to the target in 2022.

The job now is to persuade the world that it really will allow modest inflation and that any coming economic party “will be worth attending.” They insist that any “slow down” policies will be based on actual problems rather than “forecasts of potential future stresses.”

Powell's dismissive chuckle was just one piece of the messaging, and he returned to the prevailing idea in several ways. For example, he pledged that “we will continue to provide the economy the support that it needs for as long as it takes.” Also, “we're not going to act pre-emptively based on forecasts for the most part, and we're going to wait to see actual data. And I think it will take people time to adjust to that, and the only way we can really build the credibility of that is by doing it.”

“People start businesses, they reopen restaurants, the airlines will be flying again — all of those things will happen and they will turn out to cause one-time bulges in prices, but they likely won't change inflation going forward.”

He also played down the release of the Fed's “dot-plot” of when to expect it to be time to raise rates. Four of 18 Fed officials thought that rate increases would be warranted by the end of 2022, and seven by the end of 2023. Powell emphasized that a comfortable majority envisioned no rate increases in the next three years.

The questions he faced from the press Wednesday were just the beginning of what figures to be a perennial topic whenever he or other leaders of the central bank face lawmakers, business leaders or the news media. The tone and details may vary, but will all mean: “Are you sure you're not going to start tightening the money supply?”

The questions might tie into inflationary pressures. For example, many conservatives have already started to complain about rising gasoline prices. Based on the experience of past Fed leaders, Powell can expect plenty of questions about that in his next visit to Capitol Hill.

Or the questions could focus more on booming financial markets and whether the Fed needs to raise rates to rein in speculation.

In many ways, it is the inverse of the situation that Paul Volcker faced as Fed leader in the early 1980s, as he engineered aggressive rate increases to curtail the high inflation of that era. He had to resist pressure from fellow Fed appointees who had not fully bought into the overall strategy, even threatening to resign rather than lose a close vote.

The situation is certainly not that dramatic — yet — in 2021, given the unanimous vote on the new policy framework and the apparent strong majority on the committee who believe rates need to stay low.

But if history is a guide, and inflation trends and financial markets are as unpredictable in the months ahead as they have been in the recent past, it may take more than a laugh for Powell to dismiss questions from the tight-money crowd.

So, we will see. Certainly, everyone will be watching price trends as the economy recovers — and there is deep concern in many quarters that the policy makers will allow “too much” inflation,” what ever that is. The Powell approach almost likely will be highly controversial and should be watched closely as it emerges, Washington Insider believes.

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