Wall Street’s swoon has yet to worry economists for now
WASHINGTON: Wall Street’s nosedive this week and a spike in market volatility, surprising as they were, do not threaten US economic momentum, according to economists, some of whom even welcome the falling prices.
But if there were a prolonged retreat in equities markets, that could spill over into the real economy under some circumstances, they say.
“This was not that big of a bump in the equity market,” William Dudley, president of the Federal Reserve Bank of New York, said Wednesday during a conference.
The rocky few days of trading would have “virtually no consequence” for the larger economy, he said.
The flagship Dow Jones Industrial Average shed 4.6 per cent on Monday, posting its biggest single day point drop ever and sparking a global selloff, but it recovered some of the losses in a wildly volatile session Tuesday.
While Dudley noted that stocks remained well above their levels from a year ago, a sharp correction on Wall Street could still be something to worry about.
According to Oxford Economics, an average dip of 10 per cent on world equities markets would shave 0.3 percentage points off the GDP growth for the Group of 7 major economies over two years.
The fallout could be worrisome for consumer and business confidence. The rising market over the past year as Wall Street hit repeated records, gave a boost to American retirement accounts that has helped sustain consumer spending, a key driver of the US economy.
Even after this week’s losses, the Dow is still up 37 per cent since President Donald Trump’s election in November 2016.
He has repeatedly taken credit for Wall Street’s heady run but was quiet about it on Monday.
But in a tweet Wednesday he seemed to criticize the market moves.
“In the ‘old days,’ when good news was reported, the Stock Market would go up,” the president said on Twitter.
“Today, when good news is reported, the Stock Market goes down. Big mistake and we have so much good (great) news about the economy!”
Now in the ninth year of recovery, the world’s largest economy grew at an annual rate of 2.6 per cent in the final quarter of 2017.
Trump insists growth could top three per cent this year while the Fed predicts growth of 2.5 per cent.
But one question on economists’ minds is whether Wall Street’s volatility could alter the Fed’s intentions.
The central bank expects to raise rates three times this year to get ahead of an anticipated rise in inflation but this could change if the economy begins to overheat.
Anna Cieslak, professor of economics at Duke University, told AFP her research shows the Fed does react to market movements.
“While the reading of Fed texts suggests that the Fed is not outright willing to admit that they care about the stock market, they certainly care about financial conditions,” she said. — AFP