Despite 6% Monthly Drop of Dow, One Factor Could Prevent Recession
Since July 23, in just over a month, the Dow Jones has fallen by nearly six percent from 27,349 points to 25,777 points, leaving investors with lingering doubts about a potential recession.
Last month, Gita Gopinath, the chief economist at the International Monetary Fund, warned that the imposition of additional tariffs by the U.S. could intensify the trade conflict between the U.S. and China, which may slow down the growth of the global economy by half a percent.
“If the current tariffs continue to be in place, and if there is a further escalation that includes all of trade between the U.S. and China, then that would shave off about half a percent from the level of global GDP in 2020,” she said.
Since then, the dispute between the U.S. and China has arguably worsened following the imposition of additional sanctions on China by U.S. President Donald Trump, causing the Dow Jones and the rest of the U.S. equities market to demonstrate a sluggish short term trend.
One Catalyst Still in Play For the Dow Jones
In an op-ed published on Bloomberg, former New York Federal Reserve President William Dudley emphasized that the Federal Reserve should not cave into the demands of President Trump by adjusting the benchmark interest rate based on the outcome of the trade war.
“Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election,” Dudley said.
If President Trump does not get decreased rates at the current juncture of the trade dispute, there is a possibility that the Dow Jones and the global equities market, in general, continues to slump, contributing to a widely feared recession.
Quickly after the release of the op-ed and the call of Dudley for the Fed to prevent taking a reactive approach in adjusting the benchmark interest rate, the Federal Reserve stated that it will not take political considerations, rejecting the encouragement of Dudley to prevent the roll-out of stimuli to lessen the negative effect of the trade war.
“The Federal Reserve’s policy decisions are guided solely by its congressional mandate to maintain price stability and maximum employment. Political considerations play absolutely no role,” a Federal Reserve spokeswoman said.
While some analysts predict the trade war to last throughout the year’s end and possibly onto the first half of 2020, the Federal Reserve has clarified its stance and is likely to gear towards a rate cut shall geopolitical risks continue to intensify.