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Wall Street's swoon doesn't worry economists... yet

Feb 09 2018 07:47

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 flag-ship Dow Jones Industrial Average shed 4.6% 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 on 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% on world equities markets would shave 0.3 percentage points off of 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% since President Donald Trump's election in November 2016. He has repeatedly taken credit for Wall Street's heady run but was quiet 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!"

Does the Fed actually care?

Now in the ninth year of recovery, the world's largest economy grew at an annual rate of 2.6% in the final quarter of 2017.

Trump insists growth could top three percent this year while the Fed predicts growth of 2.5%.

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.

The Fed appears to react to negative market shocks by delivering "unexpectedly positive news" to reassure the market, she added.

Dudley appeared to echo this view, saying that so far, at least, the week's wide ride for stocks was a "big story" for the press and for market players "but I don't think it's a big story at all for central bankers."

But a prolonged market downturn would be another story.

"If the stock market would have gone down precipitously and stayed down then that would feed into the economic outlook and that would affect my view in term of what the implication for monetary policy," he said.

Still, according to Capital Economics, the dip in stock prices "may conceivably be nothing more than a healthy correction."

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equities  |  wall street  |  markets
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