Equity prices would drop even more, causing steeper declines in wealth and demand. The soft landing would become a crash. Unfortunately, policy decisions are no longer simple in a world where the stock market greatly affects economic activity. Keep in mind that the Fed doesn't want to reignite the very same stock-market forces that created the excessive demand growth that the central bank wants to eliminate. Policymakers also know that the market's sway over demand adds greatly to the uncertainty in the economic outlook for 2001.
Slower growth makes the economy more vulnerable to outside shocks, such as higher oil prices.
Add it all up, and the stock market's increased influence means that the Fed has to walk an unusually fine line in 2001. No question, the data look soft, especially from manufacturing. Households were clearly less optimistic in December, reflecting worries over the stock market, election uncertainty, and downbeat headlines. But while consumer spending is slowing, fourth-quarter outlays appear to have held up well. Moreover, much has been made of weak holiday spending, but 2000's retail performance is being judged against the extraordinarily strong sales of yearend 1999.