Bottom Line: The market nosedive does not yet guarantee Fed action in the near future. History has shown the Fed tends to react with a lag. They should have learned better by now, but if they had learned anything, they would not have pushed forward with hawkish rhetoric earlier this year. Arguably, they will hold firm, let the markets think they are out of the game and further bid down implied inflation expectations, and then, once the damage is done, up the level of stimulus. Terrible way to run an economy, I know.I think this is exactly right, and it shows how misguided the Fed is right now. If the Fed is looking at market inflation expectations (and they have made it clear they are) they seem to be forgetting that those expectations have expected monetary policy built into them. To the extent that expectations deviate from the Fed's implicit goal (2-3%), they already represent policy failure.
To use a "Sumnerian" analogy, it would be like the captain of the Titanic looking at market expectations of their eventual destination and saying "Expectations say we'll be in New York City on time, looks like my job is done!", without realizing those expectations exist because he is expected to appropriately react to changing conditions (and avoid icebergs!).
It's actually worse than this though, because the Fed will never make up for "lost" NGDP growth. They've already made it quite clear they aren't comfortable with inflation above ~2% under any circumstances, and so we are left with a permanently lower NGDP and price level trend.
To put this into perspective, in 2008, when the financial crisis began, a good guess for 2018 NGDP would have been about $26 trillion. Right now, even if we get 5% NGDP from this point forward it will be just over $22 trillion! Over the course of a decade this will have added up to a $27 trillion* difference in nominal income! Too bad for anyone paying wage contracts, but at least employees got a nice real wage boost! And sure, it hurts debtors, but investors have done fantastically! You may detect a hint of sarcasm. So much for the "trade offs" of inflation/deflation between creditors and debtors that some are pushing.
* I originally mistakenly wrote it would result in a $105 trillion difference because I forgot I was dealing with quarterly annualized numbers.