The US Fed should not succumb to market pressure

livemint.com:

Family Feud, a popular game show when I was growing up, would ask contestants to guess how a group of people had answered a specific question. It served as a regular reminder of the importance of supplementing one’s thinking with external perspectives. If, in the tradition of Family Feud, we were to poll market participants about the turmoil we’ve seen since the worse-than-expected US jobs report, I suspect we would get quite specific responses on what is causing the global stock selloff as well as what would be the best circuit breaker to avoid further big losses.

Let’s consider what I think that list would look like before departing from the game show’s format and exploring what I believe the answers should be. Five things have come together to destabilize what seemed to be fundamentally solid stock markets. Here they are in order of declining importance.

First are worries that a slowdown in US growth would meaningfully undermine the ‘American exceptionalism’ we’ve seen over the past few years. Such a deceleration would damage corporate earnings and turn the strongest engine of global growth into a possible detractor. Second is concern that an economic downturn will be worsened by the Federal Reserve’s decision not to cut interest rates, which left its policy stance too restrictive for the current environment and heightened the risk of another policy mistake.

Third is crowded investment positions being caught offside by the sudden change in both the economic and policy narratives. This squeeze was amplified by concerns of a Japanese-related deleveraging and sky-high valuations in certain segments of the market such as technology stocks. Fourth would be geopolitical worries centred on the possible escalation of the