Stocks saw their worst day of the year on Monday, after Beijing suggested it was weaponizing its currency by devaluing it— the latest sticking point in an ongoing U.S.-China trade war.

After America retaliated by formally labeling China a “currency manipulator” — something that hasn’t been done in over 2 decades — it sparked new market fears about the economic fallout.

President Donald Trump has hammered the Federal Reserve for not taking more aggressive steps to cut rates — and at least one economist says he agrees, as the outlook worsens.

“I’ve been a forecaster my entire professional life and one thing we always look at is where’s investment going — because investment determines future hiring, future productivity, and future real wages and real incomes,” Milken Institute chief economist William Lee told Yahoo Finance during a recent interview.

“Investment is crashing — not only in the U.S. but around the world so that’s the thing I am most concerned with,” he added.

And the Federal Reserve could do more to help, according to Lee.

“We need to have a policy back-stop to reassure confidence among producers and investors...that’s something the Fed has failed to do,” Lee said.

He compared Fed chairman Jerome Powell to European Central Bank chief Mario Draghi, who has embraced a ‘We’ll do everything it takes’ to back-stop the economy,” Lee said.

“And if he were to do that I’d think we’d have much more solid growth going forward,” he added.

Interest rates too high?

China’s unexpected currency intervention provided an opening for Trump to once again target the Fed over its interest rate policy, despite the central bank's decision to cut rates by 25 basis points last week.

“It’s called ‘currency manipulation,’” Trump said in a Twitter post. “Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”

Late Monday, the U.S. officially accused China of manipulating its currency, and Beijing moved to limit the damage. But there could be pause for China to fully weaponize its currency moving forward.

“If [China does] let the exchange rate go, domestic residents that are holding yuan assets are going to say, ‘My God this stuff is worth less than other global assets’ so there could be a massive capital outflow,” Lee warned, citing Beijing’s 2015 attempt to devalue the yuan.

And when it comes to lower interest rates, Lee explained the president just might have a point.

“What President Trump is trying to do is get the rates down on the short-end because that is what the Federal Reserve can control,” the economist said.

“But remember the long-end — the 10-year treasury (TNX) and the 30-year Treasury — are dropped down to the 170s now because global interest rates are also incredibly low,” he added.

The yield on the 10-year note dropped Monday to its lowest level since 2016.

Both Europe and Japan have implemented below-zero interest rates, in an unconventional bid to boost growth and inflation.

“The U.S. having such high long-term rates is incompatible and really misses the line with the global economy,” he added.

On Monday, the Dow (DJI) shed as many as 961.63 points at the lows of the day, with tech stocks including Apple (AAPL) leading declines.

Trade bellwethers like Boeing (BA) and Caterpillar (CAT) also saw steep losses as China allowed the yuan (CNHUSD=X) to weaken past seven per U.S. dollar (DX-Y.NYB) for the first time in over 10 years.

Alexandra Canal is a Producer at Yahoo Finance. Follow her on Twitter: @alliecanal8193

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