Evening Report | September 21, 2022

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Fed raises interest rates another 75 basis points, more hikes coming... The Federal Reserve raised its target interest rate by 75 basis points to a range of 3.00% to 3.25% following the two-day Federal Open Market Committee (FOMC) meeting. The Fed remains “strongly committed to returning inflation to its 2.0% objective.”

The so-called “dot plot” of new projections from Fed officials showed the fed funds rate rising to 4.40% by the end of this year before topping out at 4.60% in 2023. That implies another 75-basis point hike in November, followed by a 50-point increase in December.

The post-meeting statement said “recent indicators point to modest growth in spending and production,” though rising interest rates are expected to slow economic growth. The committee’s quarterly economic projections showed it expects economic growth slowing to 0.2% by the end of this year before rising to 1.2% in 2023. The unemployment rate is projected to rise to 3.8% this year and 4.4% in 2023. Inflation is seen slowly returning to the Fed’s 2% target in 2025. Rate cuts are not foreseen until 2024.

In his post-meeting press conference, Fed Chair Jerome Powell noted “price pressures remain evident” and said the Fed will continue to take “forceful and rapid” steps the moderate demand and lower inflation. “We’re committed to a restrictive level and getting there pretty quickly,” he said. The aggressive stance to fight inflation will slow economic activity and Powell said achieving a soft landing would be “very challenging.” Powell said policymakers are uncertain if the tightening monetary policy will eventually lead to recession.

Powell warned against reversing course and lowering interest rates too quickly – even though the aggressive monetary policy tightening will slow economic activity. He noted, “The historical record cautions strongly against prematurely loosening policy.”

Confluence Investment Management says this rate hike was “historic,” as it “lifted the policy rate above the previous cycle’s peak for the first time since 1981. The milestone possibly reflects the central bank’s confidence in financial market conditions. The previous two economic downturns exposed the weaknesses in the financial system and forced the Fed to develop policy tools designed to prevent a crisis. Therefore, we may be heading into a new finance regime in which the Federal Reserve raises interest rates and maintains those rates for much longer. If so, the tech sector’s dominance in the S&P 500 is likely over. However, the financial services industry could be on the ascent.”

“The Fed’s new policy tools will be tested as the central bank ramps its balance sheet reduction and rate hikes over the next few months. Quantitative tightening is expected to cause financial strain as traders struggle to get deals done. The Bloomberg U.S. Government Securities Liquidity Index, a gauge of deviations in yield compared to a fair value model, dropped to its lowest level since March 2020. The deterioration in the index suggests that traders find it more challenging to exchange treasuries for cash and vice versa. If the problem worsens, the Fed will be forced to intervene. Although the financial system is withstanding monetary tightening now, we are still not sure that a financial mishap will not take place in the future. In the event of a blowup in the financial system, we expect the Fed to become more accommodative in its rate policy. As a result, we believe that the Fed could pause or cut rates by mid-2023 if financial conditions deteriorate significantly.”

Ethanol production plunges... Ethanol production fell 62,000 barrels per day (bpd) for the week ended Sept. 16 to 901,000 bpd. That was 2.7% below the corresponding week last year and the lowest weekly average since the week ended Feb. 26, 2021. Ethanol plants continued to slow operations amid downtime for maintenance ahead of new-crop supplies, but falling gasoline demand is also an issue. Gasoline demand was the lowest since February and 5% below last year, despite the sharp drop in pump prices from the peak earlier this year.

Ethanol stocks dropped 342,000 barrels to 22.501 million barrels, the lowest level since late 2021.

Wide range of estimates for August cattle placements... USDA’s Cattle on Feed Report is expected to show the Sept. 1 feedlot inventory in line with year-ago at 11.2 million head. Placements are expected to be down 2.7% from year-ago, though the range of estimates is from 93.2% to 100.9%. August marketings are expected to be up 5.9% from year-ago, which would fit with talk packers pulled forward some animals last month, though there was an extra work day this year compared with last year.

CR bogs down... Sen. Richard Shelby (R-Ala.), the top Republican on the Appropriations Committee, again pleaded for a “clean” continuing resolution (CR), meaning a bill without extraneous policy provisions such as sometimes-centrist Joe Manchin’s (D-W.Va.) permitting reform proposal. “I say it again and again and again,” Shelby said. “The cleaner that CR is, the better it is. I don’t know how much and where all the opposition to the Manchin proposal is but there’s going to be some, and we’ll have to see where our caucus is on this. I like a clean CR – as [clean as] we can get it.” The CR is expected to include around $12 billion for Ukraine. Manchin condemned what he described as “revenge politics” as many Republicans have resisted his efforts to speed up the approval process for energy projects. 

With government funding set to expire in 9 days, most of the Democratic attachments are set to be kicked off the bill to avert a government shutdown.

House Ag ranking member sees shift from climate focus in new farm bill... Rep. GT Thompson (R-Pa.), ranking on the House Ag panel, said a farm bill conservation title written by his party would focus less on the Biden administration’s climate priorities and more on retooling conservation programs to be innovative and economically useful to farmers. He listed priorities on Tuesday that he said Republicans would pursue in a new farm bill in 2023. “I hope in the next Congress we can truly evaluate the funding needs for these programs paired with an evaluation of the ability to effectively and judiciously deliver these funds to farmers,” Thompson said. “I don’t feel bound by the amount of funding or the specific program allocation passed in the partisan IRA bill,” Thompson said, referring to the August reconciliation bill. Thompson made his comments at a Subcommittee on Conservation and Forestry hearing at which Chairwoman Abigail Spanberger (D-Va.) and ranking member Doug LaMalfa (R-Calif.) heard comments about voluntary conservation programs that are popular with farmers, ranchers and forestland owners but are oversubscribed and understaffed.

Thompson said Congress needs to scrutinize USDA’s use of $20 billion included in the August reconciliation package for major environmental programs. The $20 billion will provide about a 47% increase over previous farm bill levels, according to an analysis from the National Sustainable Agriculture Coalition.

Thompson also said he and his colleagues will look at the $2.8 billion in multiyear grants from the Commodity Credit Corporation (CCC) for climate-smart projects that USDA Secretary Tom Vilsack announced Sept. 14, with $700 million additional funding to be announced later. The program, Partnerships for Climate-Smart Commodities, will fund programs for greenhouse gas reductions on dairy farms, and projects to build markets for climate-smart beef, grains and fruits and vegetables. “There is strong and growing interest in the private sector and among consumers for food that is grown in a climate-friendly way,” Vilsack said in a statement announcing the new programs.

“Congress must be mindful of this massive amount of funding before amending programs or making policy changes that reorient programs toward climate. No one natural resource concern should be prioritized over others,” LaMalfa said.

More than 140 million acres of farmland in the U.S. are currently receiving conservation-related financial and technical assistance from the federal government, according to an analysis from the Farm Bureau. By comparison, the national park system has more than 85 million acres, according to the National Park Service.

Michael Crowder, president of the National Association of Conservation Districts, stressed one message to members. “Voluntary, locally-led, incentive-based conservation works.”

Asian Development Bank cuts growth forecasts for emerging economies in Asia... The region’s growth-rate estimate for 2022 has been revised down to 4.3% (from 5.2% in April) because of rising inflation and China’s zero-covid policy. China’s economy is expected to grow by 3.3%, which would be a slower rate than other Asian emerging economies for the first time in 30 years. The bank cut its growth forecast for India to 7%, down from 7.5% previously.