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Volatility in stock market shouldn't hurt China, US economy

By Nariman Benravesh (China Daily)
Updated: 2007-03-09 15:03

Unless the recent stock market volatility in the US turns into an extended bear market, the impact on growth will be very limited. The 3.3 percent drop in the Down Jones index on February 27 was only the 268th largest drop on record. Increased volatility is unlikely to have an impact on consumer spending, but could make companies a little more risk averse.

The Federal Reserve's job has once again become more difficult.

Until recently, the Fed was expected to keep interest rates at current levels for an extended period of time.

However, the recent market turmoil has increased the downside risks and the odds that the Fed may cut rates in the late spring or over the summer.

Two types of events could influence the Fed's decision about an interest rate cut. First, Federal Reserve Chair Ben S. Bernanke and his colleagues may have no choice but to ease rates if the US economy decelerates further, because of a deeper recession in housing or more weakness in capital spending.

Second, they could move even more aggressively if stock prices fall by a large amount in the next few weeks and months. In the past 20 years, the Fed has moved decisively to limit the damage from large stock market crashes.

Right after the 22.6 percent drop in the Dow Jones index on October 19, 1987, Greenspan assured markets that enough liquidity would be provided to ensure that financial markets would not freeze up. This set the stage for 4.4 percent growth in the following year.

In the final analysis, while the most likely scenario is for the United States to avoid a recession, growth will be weak and financial waters very choppy.

The writer is chief economist of Global Insight, a leading international economic and financial forecasting firm

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