Federal Reserve Study Raises Concerns About US Economy Amidst China’s Slowdown

A recent study conducted by the Federal Reserve has sparked concerns about the strength of the US economy. While some economists have been downplaying the potential consequences, this study paints a different and potentially worrisome picture. It suggests that if China’s economic growth falls short of expectations, it could have significant repercussions for the United States.

According to a team of eight economists at the Federal Reserve, even a relatively modest 4 percentage-point drop in China’s economic growth could set off a chain reaction. Investors might rush towards safer investments, causing a surge in the value of the US dollar while sending Treasury yields and stock prices tumbling. In the end, US economic growth could suffer a decline of more than 1 percentage point.

Although the trade relationship with China represents only a fraction of the US economy, this study underscores the intricate interconnections of the global economic system. A major economic downturn in China could send shockwaves through global financial markets, potentially causing substantial harm to the United States.

The author of the study, Anna Wong, is cautioning that these findings are just as relevant today. Despite the anticipated growth of China’s economy, a significant underperformance could lead to severe consequences. It’s not just about the direct trade between the two countries; it’s also about how investor confidence and financial stability could be affected.

Furthermore, this study highlights the potential consequences for emerging-market nations that heavily depend on China as an export destination. With global debt levels already high and low-income countries facing economic challenges, a slowdown in China’s economy could worsen the situation.

Past experiences have demonstrated that China’s economic troubles can echo throughout global financial markets. For instance, in 2015, a sudden depreciation of China’s currency, the yuan, and declines in Chinese stock markets triggered turmoil, resulting in an 11% decline in the US S&P 500. This led the Federal Reserve to postpone plans for increasing interest rates and prolonged concerns about China’s economic health.

However, there are some factors today that could help mitigate the impact of a major economic shock in China. Such a shock might lead to lower global prices for commodities, which could ease inflationary pressures in the United States. Additionally, the Federal Reserve has more flexibility to adjust interest rates compared to 2015 when rates were near zero.

Despite the uncertainties surrounding China’s economic outlook, it’s worth noting that China has managed to maintain relatively steady economic growth rates in the past. Nevertheless, the question remains: What would happen if China’s growth falls short by 4 percentage points? The answer is far from certain and calls for careful consideration.