The Market Is Stressed But The Fed Doesn't Need To Intervene? This is the opinion of an economist

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Higher volatility has led to increased market pressure this week, Goldman Sachs economists emphasized in a note on Tuesday.


Economists say they are introducing a new measure of financial stress aimed at identifying market disturbances outside the scope of their Financial Condition Index (FCI). This measure, called the Financial Stress Index (FSI), has tightened significantly in the last two days but remains within normal levels.


"This has been driven by expectations of higher volatility in equity and bond markets, while conditions in short-term financing markets generally remain stable," the economists wrote in the note.


"So while market pressures are more pronounced than last week, our FSI suggests that there are no serious market disruptions to date that will force policymakers to intervene."


Since July's weak jobs report last Friday, the equity market has declined about 5%, and the 10-year Treasury rate has declined by 21 basis points.


According to Goldman economists, FCI's growth impulse model suggests that these changes, along with changes in other asset classes, will reduce GDP growth over the next year by about 12 net basis points. FCI takes into account equity prices, short-term and long-term interest rates, credit spreads, and trade-weighted dollars.


"From a healthy economic starting point, the risks so far seem limited," the economists reported.


They also estimate that each additional 10% sale in equity will reduce GDP growth over the next year by about 45 basis points. When considering movements in other asset classes that typically accompany the equity market selloff during growth scares, the total impact is around 85 basis points.


"This implies that, from an initial GDP growth rate of over 2%, it may take significant further selling to single-handedly push the economy into recession."


However, for the Federal Reserve to cut rates faster is far less likely, as policymakers may be inclined to be cautious, especially given the needlessly high current funds rate.

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