Washington Insider -- Friday

Fed Sticking With Inflation View

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

Court Invalidates Three SREs Granted Late By Trump Administration

The Tenth Circuit Court of Appeals on Wednesday invalidated three small refinery exemptions (SREs) granted by the Trump administration to Sinclair Wyoming Refining Company, returning the matter to EPA for review. EPA sought the court action, arguing the SREs--one for the 2018 compliance year and two for the 2019 compliance year--had been fully examined.

Sinclair declined to oppose the EPA request.

Biofuel backers welcomed the action, with Renewable Fuels Association CEO Geoff Cooper hailing the court action as they agreed the waivers had been "improperly granted."

While a victory for biofuel supporters, the biofuel waiver issue is currently before the U.S. Supreme Court following an earlier Tenth Circuit decision that invalidated three SREs for the 2016 compliance year. And EPA has said they will not act on any pending SREs until after the nation's top court issues its ruling.

And the number of pending SREs continues to rise as EPA now shows there are 32 pending for the 2019 compliance year and 18 for the 2020 compliance year, an increase of two for both years.

Biden Budget Release Pushed Back By One Day

The Biden administration's Fiscal Year (FY) 2022 budget proposals will not be released until May 28, according to the Office of Management and Budget (OMB), one day later than had been previously signaled.

The budget release will be looked to for more details on the Biden tax and spending plans for FY 2022, including the $4 trillion the administration has proposed for infrastructure and social spending.

And it will allow lawmakers on the Hill to really dig into the government funding issues ahead via the annual appropriations measures.

And the situation will also factor into the efforts by Democrats to push through a budget resolution that will allow the use of budget reconciliation to bypass Senate rules that normally require 60 votes to get things like the $4 trillion in spending envisioned in the infrastructure and social plans.

Washington Insider: Fed Sticking With Inflation View

Fed officials met at the end of April and continued to hold to their view that the rise that was being seen at that point was "transitory" and would not be "more persistent than expected," according to minutes from the April 27-28 session.

But that view may not be as universal as it seems or at least as universal as some Fed officials continue to insist.

When the Fed issues the minutes from their meetings, they do not attach any names to comments and generally do not use any more than rather generic terms to describe the numbers that express a certain opinion. Terms like "some" or "few" or "many" are often used, leaving something to the imagination the actual number of Fed officials that think the way the comments indicate.

And meeting recap dealing with inflation is case and point. The recap noted "some participants mentioned upside risks around the inflation outlook that could arise if temporary factors influencing inflation turned out to be more persistent than expected."

When it came to their $120 billion per month purchase of bonds that aims to keep lending rates low and spur economic activity, their decision on when to begin tapering those purchases was notable. The decision to trim or "taper" those buys, would be one of the first actions by the Fed to tighten monetary policy -- make it more expensive to borrow money.

The meeting recap noted that "some" emphasized their decision on the bond purchases would be determined by actual results, not on "uncertain economic forecasts." But there were "a couple of participants" who said the "risks of inflation pressures building up to unwelcome levels before they become sufficiently evident to induce a policy reaction."

The Fed officials also noted the strong spending by consumers who were in part working off of stimulus dollars doled out by the government via the March COVID aid package.

But that consumer spending is another potential inflation worry, according to the meeting recap. Rising consumer spending as the economy continues to reopen was another factor Fed officials said would likely "boost inflation temporarily, particularly if supply bottlenecks limited how quickly production could respond to demand in the near term." But even so, officials also "viewed these increases in prices as likely to have only transitory effects on inflation."

As for when that discussion on tapering the bond purchases will start, "various participants" pointing out it would "likely be some time" before the Fed shifts from its stance that asset purchases will continue at least at the current pace until there is "substantial further progress" toward the Fed's goals.

But the minutes also said that "a number" of Fed officials thought if the U.S. economy keeps posting rapid progress, that discussion on tapering the bond purchases would come at "upcoming meetings."

That still leaves the Fed plenty of wiggle room on when that discussion will take place. But the rise in inflation may bring on that discussion faster than "some" Fed officials apparently think. There are five meetings of the Fed remaining this year -- June 15-16, July 27-28, September 21-22, November 2-3 and December 14-15.

So we will see. The current monetary policy in place has kept interest and financing costs low for farmers, so the coming debate on those bond purchases is one that needs to be watched closely given the prospect that it will increase those borrowing costs and make them a rising, rather than falling, production expense, Washington Insider believes.

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