Goldman Sachs: The Federal Reserve must pay attention to the impact on US stocks!

"The stock market is not equivalent to the economy" is a common saying on Wall Street.

However, according to Goldman Sachs, US stocks can actually have a direct impact on the US economy, so the Federal Reserve should closely monitor the dynamics of US stocks.

Goldman Sachs economists wrote in a report this week: "Since the release of the July employment report last Friday, US stocks have fallen by about 5%, and the yield on 10-year US Treasury bonds has also dropped by 21 basis points. According to our Financial Conditions Index (FCI) growth impulse model, these and other changes in asset classes are expected to reduce GDP growth by approximately 12 basis points over the next year."

Goldman Sachs pointed out that although the recent decline in US stocks "appears to have limited impact on the broader economy so far," if stock prices continue to fall, it could have negative effects on the economy and influence the Federal Reserve's interest rate decisions.

Goldman Sachs estimates that for every additional 10% drop in US stocks, US GDP growth will decrease by 45 basis points over the next year, " taking into account the changes in other asset classes that usually occur alongside a decline in US stocks, the overall impact is approximately 85 basis points."

Goldman Sachs believes that given the current US GDP growth rate is above 2%, if US stocks were to unilaterally drive the US economy into a recession, they would need to fall by more than 20%.

The significant impact of a sharp decline in US stocks on the economy is mainly due to the wealth effect, where consumers reduce spending when the value of their investment accounts significantly decreases, and vice versa.

Goldman Sachs believes that a potential further decline in US stocks could affect the Federal Reserve's monetary policy.

Goldman Sachs stated: "On the one hand, policymakers may be overly cautious, especially starting from unnecessary high interest rates, and on the other hand, the current financial conditions have assumed that the Federal Open Market Committee's policy easing will exceed expectations from a few days ago."

Since the increased volatility in US stocks on Monday, market commentators including Wharton School professor Siegel believe that the Federal Reserve should urgently cut interest rates by 75 basis points, followed by another 75 basis points cut in September.

Such a significant rate cut would help consumers reduce debt costs and potentially activate the frozen real estate market. However, given that the S&P 500 index has only dropped 7% from its historical high, Goldman Sachs believes that such a decline is not sufficient to prompt Federal Reserve intervention.

Goldman Sachs stated: "Although market pressures are significantly higher than a week ago, our FSI (Financial Stress Index) shows that there has not been severe market turmoil compelling policymakers to intervene so far."