Washington Insider -- Monday

Monetary Policy Fight

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

Branstad Sees Hope for US-China Trade Situation

Attempts to resolve a damaging trade war between the U.S. and China are expected ahead of a planned meeting between President Donald Trump and Chinese President Xi Jinping at the G-20 in Argentina at the end of November, according to U.S. Ambassador to China Terry Branstad.

"We want this to be a constructive, results-oriented relationship with China," Branstad said. "The U.S. is not trying to contain China but we want fairness and reciprocity."

Xi said last week that China wants to resolve problems through talks, but Washington must respect Beijing's choice of development path and interests.

Regarding U.S./China trade issues, USDA Secretary Sonny Perdue issued a statement saying he "expressed optimism that President Trump's approach to trade will lead to a resolution of the dispute with China."

Meanwhile, a Trump administration source informs that the goal is to have a major U.S./China agreement in place or a framework agreement in principle by the end of January 2019.


Talks Focus on US Metal Tariffs

Mexico and Canada both say that want to resolve issues around U.S. tariffs on steel and other metals and on lifting their countermeasures on U.S. products, including several farm goods (pork, dairy, etc.).

Canada responded to the U.S. steel tariffs with retaliatory duties on about $12.6 billion worth of American imports, including food and beverage items.

Canada does not like quotas, as talks continue, with Canada stressing they have taken measures to control the flow of international steel via Canada into North America.

Meanwhile, Mexico's economy minister Ildefonso Guajardo noted that U.S.-Mexico trade adds up to more than $500 billion, while the tariffs between the countries only hit about $3 billion in goods in each country. "Yes, it is not desirable to sign an agreement without considering the tariffs," he observed, but said they would go ahead with signing the deal given the importance of the trading relationship.


Washington Insider: Monetary Policy Fight

You might have thought that after the midterms, things would quiet down in Washington, but that is unlikely, Bloomberg is reporting this week.

The new debate subject could well be monetary policy, as the Federal Reserve continued to signal at its meeting last Thursday that "further gradual increases" in interest rates are coming for the "strong" U.S. economy.

Bloomberg thinks this is a message that could be increasingly unpopular as Democrats and Republicans seek more spending next year while gearing up for the 2020 fight for control of Congress and the White House.

Democrats, soon to be in command of the House of Representatives, are pushing for infrastructure spending and a wider distribution of gains to workers from a hot job market, Bloomberg says. Republicans want economic growth to accelerate from their tax cuts, deregulation and defense spending. Steadily rising interest rates can be contrary to both goals.

Caught in the middle is Fed Chairman Jerome Powell, who's already taking flak from President Trump for boosting borrowing costs while the economy is humming.

Powell, perhaps anticipating even more political heat, is being proactive in his outreach to Congress, which has oversight of the central bank: He has met with or called lawmakers 77 times since becoming chairman in February, according to his calendar. During September alone, a busy month that included a policy meeting, his diary shows 18 meetings or telephone conversations with congressional members.

The reality is, both parties need to preserve the investing public's trust in the Fed to underwrite their political goals. Without sound monetary policy that keeps inflation in check, neither wage gains nor moderate borrowing costs on growing federal debt are sustainable.

"Austerity is going to be on nobody's platform for the foreseeable future," said Lou Crandall, chief economist at Wrightson ICAP. Democrats and Republicans will push the U.S. toward "peak fiscal indiscipline" over the next couple of years, he said.

What both parties have learned is that, for now, the debt-carrying capacity of the economy is seen to be high. One reason is the U.S. continues to be the world's biggest provider of safe assets.

"We are the prettiest pig in the pig pen and we will be so for some time," said David Beckworth, a senior research fellow at the Mercatus Center at George Mason University. "We have greater debt capacity than we thought we had."

The premium investors collect for the risk of locking their money up in a 10-year Treasury note, instead of rolling their cash over in short-term maturities, is negative by one measure, meaning investors see little risk of loaning their money to the government for a decade.

"Treasury yields are still historically low and debt costs are still pretty attractive," said Justin Waring, investment strategist for the Americas at UBS Global Wealth Management in an interview. "If you were going to run a record deficit this is the time to do it."

Following the passage of the Republican tax cut -- which rocketed projections for debt held by the public to 96.2% of gross domestic product by 2028 from 76.5% in 2017 -- 10-year Treasury yields are hovering around 3.19% compared with 2.4% at the end of last year.

Over that same period, long-term inflation expectations, derived from Treasury Inflation-Protected Securities, have barely risen to 2.05% from 1.98%. That's another sign of investor faith that the central bank won't print money to pay the national debt.

The way the Fed keeps inflation expectations nailed down in a hot economy is by signaling it is vigilant and will continue to nudge rates higher so long as growth and hiring is strong.

Futures market investors are pricing in a 75% probability that the Fed hikes a fourth time this year in December. U.S. central bankers project three more hikes in 2019.

Fed officials don't know how far they have to raise rates to keep supply and demand in balance or where "normal" is in the post-crisis economy. If financial markets tailspin, or if activity cools suddenly, they will pause and probably face some blame. At least one loud voice of Democratic orthodoxy is telling them to be careful.

"The risks of excessive tightening seem substantial," former U.S. Treasury Secretary Lawrence Summers wrote earlier this month, while trying to distance himself from Trump's Fed bashing. "On almost every occasion in the past 50 years when the Fed has tightened in a sustained way, the result has been recession."

So, we will see. Summers is right that bureaucrats tend to be too cautious much of the time. But, fine-tuning the money supply is an extremely risky endeavor that often leads to mistakes that damage the economy, so following the instincts of any administration too closely can be equally or even more dangerous. This is a high stakes fight, and one that producers should watch closely as it proceeds, Washington Insider believes.


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(GH/BAS)