How Powell and Xi can salvage global growth

The salvage team received the memo. World growth won't be great next year, but nor is 2024 destined to be a write-off. Key officials in the US and China have recognised the risk of a sharp slowdown and are beginning to recalibrate their stances. The messaging is welcome. Deeds will matter next.

The week belongs to optimists, so far. Federal Reserve policymakers questioned the need for additional hikes in interest rates and China is considering fresh stimulus to aid the country's sub-par recovery. I hesitate to call the comments from Fed Vice Chair Philip Jefferson and Dallas Fed President Lorie Logan dovish; an interest-rate cut isn't in sight. There has been, though, a retreat from hawkish positions. The tightening in financial conditions — specifically, the climb in bond yields — will minimise whatever work the Fed has left. It may negate the need for any.

Beijing and Washington are often depicted as fighting opposite problems. The Fed has been preoccupied with getting inflation down toward its 2% target, which the US central bank says will require a cooling of the labour market. In other words, some further slowdown. President Xi Jinping's team has been taking incremental steps to shore up the economy, which started wavering around April. Inflation in China isn't a worry, to put it mildly. Consumer prices declined in July and crawled above zero in August.

With the People's Bank of China subordinate to the Communist Party apparatus, fiscal policy generally takes the lead. That's why news of additional steps to spur growth are important. Among measures said to be under consideration are an increase in the budget deficit, perhaps well above the prior ceiling of 3% of gross domestic product. Until now, Beijing has resisted a broad fiscal boost for fear of accumulating too big a debt pile. It's easy to be sceptical because there have been several measures rolled out this year, including rate cuts, that haven't made much of an impact. It's the signalling that may be the most important part: There's a problem and they need to keep working at it.

The US and China, easily branded as antagonists, have an interest in coalescing around common goals. They are not acting in concert, but policy differences between Fed Chair Jerome Powell and the economic elite in China no longer seem quite so clearly drawn. The Fed is souring on further tightening and China is becoming less squeamish about loosening up on spending.

Is the global economy in such dire shape? As markets rallied Tuesday after the Fed speakers and news of China's initiatives, the International Monetary Fund had some downbeat news. Global growth will slow a little to 2.9% next year. That's well below the 3.8% average recorded in the two decades before Covid. The US economy earned an upgrade, while China's was marked down a touch.

The fund may be too optimistic, warned Ben May, director of global macro research at Oxford Economics, who reckons 2.5% is more realistic. Such misjudgement reflects too rosy a view of the US outlook, May said in a note after the IMF released its new numbers:

"We are not convinced. We still expect the lagged impact of past monetary policy tightening, more restrictive fiscal policy, and weaker household savings buffers to trigger a modest contraction… Then, we anticipate the upturn in prospects for the US economy will be mild."

Which brings us back to the Fed. For all the relief in markets after Jefferson's cautious remarks and his recognition of the impact of the recent surge in Treasury yields, his broad point didn't differ much from that of New York Fed President John Williams. In late September, Williams suggested the Fed may be done with hikes. Curiously, it didn't sink in. It's important now that the Fed doesn't step on the message by sounding too enthusiastic about further moves to combat inflation.

And for investors to parse Fed talk correctly. At potential turning points, listen to the leadership group, not backbenchers. (I have historically taken district Fed remarks with a pinch of salt, barring New York. It's worth making an exception for the Dallas Fed's Logan. Before taking the job last year, she ran the market operations at the New York Fed, one of the most senior and critical staff roles in central banking.)

Perhaps people just weren't ready to listen. The message has our attention now. And keep one eye on China, too. Unlike monetary policy, fiscal shifts can be a slow-moving beast. It's no less important for its more lumbering process, relative to cuts or hikes in borrowing costs. Help may be on the way.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.