Editors at National Review Online urge federal policymakers to resist the urge to “do something.”
Monday’s fall in the S&P (3 percent) was the biggest one-day drop since )a little bathetically) 2022. The NASDAQ took the biggest battering (-3.4 percent) reflecting the recent weakness in the tech sector. The Dow was down 2.6 percent. The VIX, an index of volatility, spiked. …
… So, what’s going on? Apart from an overdue rotation out of tech stocks, the latest jobs report disappointed. The absolute unemployment number was not high (4.3 percent), but investors look at trends, and the unemployment data have been showing a weaker job market for a little while, albeit from strong levels. Consumers (70 percent of the U.S. economy) have been showing signs of weakness too. …
… What should Chairman Powell do? We see little basis thus far to fear a market crisis so severe that the Fed must step in. On a historical basis, real interest rates are not high, and we doubt that rates could realistically be cut far enough to rescue the dangers posed by the battered office market, problems that could indeed seep into the financial system. There are plenty of reasons for concern further into the future, above all our burgeoning debt and the growing cost of net zero, and, depending on how the election turns out, the possibility of a hard left turn on taxes, spending, and regulation. But, so far as markets are concerned, these threats still appear to be over the horizon.
A greater danger is that Powell is perceived as responding too quickly to market weakness. The idea that there is a “Powell put” would only add to the upward pressure on still generous asset prices and would diminish the Fed’s all-important inflation credibility. This would even more be true should the Fed feel pressured into an emergency rate cut, something we believe to be both unlikely and unwise — it would probably also increase the upward pressure on the yen, the last thing that embattled carry traders need.
