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The question now is how much further the markets will have to fall before the Fed comes to the rescue by calling off any threatened rate increase? Think about where we are. Stock valuations are extremely high and earnings are falling and the economy is clearly decelerating. There are very few reasons to currently suspect that earnings, profits, and share prices will suddenly improve organically. This market is just about the Fed. After one of the longest uninterrupted bull runs in history, bearish investors have learned the hard way that they can’t fight the Fed. So why should they now expect to win when the Fed is posturing that it’s about to embark on a tightening cycle?

A free fall in stocks could be an existential threat to an already weak economy

If the Fed were to do what it pretends it wants to do (embark on a tightening campaign that brings rates to about 2.0 per cent in 18 months), and in the process ignore the carnage on Wall Street, I believe we would see a consistent sell off in which most of the gains made since 2009 would be surrendered. After all, how much of those gains came from bona fide improvements in the economy? It was all about the twin props of Quantitative Easing and zero per cent interest rates. The Fed has already removed one of the props, and it’s no accident that the markets have gained no ground whatsoever in the eight months since the QE program was officially wound down.

As the market considers a world without the second prop, a free fall could ensue. Now that we have broken through the October 2014 lows, there is very little technical support that should come in to play. A free fall in stocks could be an existential threat to an already weak economy. It should be clear the Janet Yellen-controlled Fed would not want to risk such a scenario. This is why I believe that if the sharp sell-off in stocks continues, we will get a clear signal that rate hikes are off the table.