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‘The Fed Cannot Stop the Bleeding’: Wall Street Banks See Increasing Odds of Recession After Trade War Escalation

Wall Street has been hesitant to cry recession for 2020—that is, until the latest escalation in Trump's trade war.

Banks are increasingly using the "r" word following President Trump's tweet on Thursday announcing an additional 10% tariffs on $300 billion of Chinese imports currently untouched—due to be implemented Sept. 1.

Morgan Stanley said Monday that, "as we view the risk of further escalation as high, the risks to the global outlook are decidedly skewed to the downside,” Morgan Stanley chief economist Chetan Ahya said in a note to investors. If the U.S. continues to turn up the heat on China with up to 25% tariffs “on all imports from China for 4-6 months, [Morgan Stanley] would see the global economy entering recession in three quarters,” Ahya wrote.

The bank predicts a higher tariff could cause global growth to weaken to a range of 2.8% to 3%, despite recent interest-rate cuts from global central banks. In fact, Morgan Stanley says that monetary policy support "will not be enough to drive a recovery until trade policy uncertainty dissipates.”

And even the Fed's latest rate-cut may not be enough to stave off recession in the U.S. “The Fed cannot stop the bleeding by placing an interest-cut bandaid on trade tensions,” Bankrate.com senior economic analyst Mark Hamrick told Fortune.

Banks remain cautious

Bank of America Merrill Lynch also sees cause for concern.

"We ... think there is a high risk of tariffs on imports of autos and parts from outside North America (with South Korea also likely getting an exemption), particularly as such tariffs would incentivize producers to meet the USMCA’s stricter local-content rules,” said economists at Bank of American Merrill Lynch, in reference to the new trade agreement between the U.S., Canada, and Mexico.

And J.P. Morgan remains concerned about the possibility of a recession as well, saying in a recent note that "the risk of recession beginning within one year based on economic data has remained above 40% for much of 2019," largely due to business confidence.

In fact, Wells Fargo also wrote in a note in June that "another escalation in the ongoing trade spat, should it occur, could push the global economy to lows not seen in a decade," referencing the possibility (which now seems imminent) of new tariffs on China's remaining $300 billion imports.

And while Citi remains wary of a recession, they don't necessarily think the latest trade escalations add too much to preexisting worries. "You have to say that the probability of recession has gone up, ... [but] I think it would be premature with the data we’re looking at," Andrew Hollenhorst, chief U.S. economist at Citi, told Fortune. Hollenhorst points out that U.S. domestic economy growth is still fairly on track.

At least for now.

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