But shareholders' predilections for short-term fixes leaves the Fed feeling pressured to cater to market fluctuations, potentially to the detriment of other economic considerations. With expectations as they were, that would have led to a blood bath on Wall Street, far worse than the ugliness we saw. If, on the other hand, a rate cut had not been assumed to be a sure thing, the absence of one would not have been disaster. It is the Fed's own past policies that have created the assumption that the Fed will lower rates whenever there is a substantial market decline, pushing share prices back up and capping potential losses for investors. Similar loosening polices were implemented in response to the Asian market meltdown.
Market corrections are by no means a sure precursor of an economic downturn.
Even now, the Fed is projecting that growth will pick up in the second half of the year. Often, stock-market corrections are in order. This is most likely the case now, when stocks are returning to more normal valuations after what has been a spectacular run. Trying to mitigate the swings of the stock market not only will be unsuccessful over time, but also will be counterproductive. Expectations of a Fed safety net create a moral hazard, encouraging investors to take on more risk than they should.