The Fed Is Already 'Matching' China
(Bloomberg Opinion) -- Donald Trump's call for the Federal Reserve to “match” the People’s Bank of China has been derided by monetary experts and rebuffed by Fed folks. It isn’t as crazy as it sounds.
In recent months the Fed’s broad policy thrust has been reasonably aligned with the PBOC’s. Their period of divergence – with the American central bank tightening and China’s easing – came to an abrupt halt earlier this year, when the Fed put its two-year campaign of interest-rate increases on pause.
This is a good thing: A supportive tone from the world’s two most important central banks is probably the one factor that can shore up confidence that the slowing global economy can pull off a soft landing.
True, the PBOC is subservient to the Chinese state and the Fed is independent from the White House. That doesn't mean the two central banks won’t share challenges – especially given the globally integrated economy and financial system. While domestic mandates will always be the context for policy, the rest of the world is increasingly brought to bear on central banks’ decision making.
Take a look at their recent rhetoric. The Fed professes to be “patient” in its next steps, with some officials countenancing the prospect of a cut (though that’s not the consensus). The PBOC, meanwhile, aims to be “prudent.” That’s generally interpreted to mean buttressing economic activity without letting debt spin out of control again. Tailored trims in banks’ reserve requirements and a few fiscal shots of caffeine have been doing the trick.
Markets are also starting to bet on the Fed easing and the PBOC adding to stimulus already underway. The reasoning is that trade tussles will slow growth and inflation enough to warrant cheaper money. The central banks themselves, however, are loath to say so explicitly.
Investor bets on rates aren't always indicative. There was skepticism that the Fed would hike in early 2017 despite fairly unambiguous signals from officials they were inclined to do so. In the realm of will-they won’t-they, it’s anemic inflation and a so-so growth outlook – more than Trump’s agenda – that could tip the scales. Few are talking about an increase.
China watchers, meanwhile, have been waiting for an outright cut for a few months now. There were a few high-profile calls in the lead-up to the Lunar New Year holiday in early February but nothing came about.
When considering the monetary landscape and what drives it, we should look at what central banks are actually doing and saying, not obsess about the political systems in which they operate. The Fed and the PBOC are more alike than you might think.
Fed Governor Lael Brainard emerged a few years ago as a prominent and influential advocate of this view. My Bloomberg News colleagues Craig Torres and Christoper Condon wrote about those here. The New York Times’s Binyamin Appelbaum wrote a good profile of Brainard here,which captured similar themes.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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