ORLANDO, Florida, Nov 24 (Reuters) - If worries over

excessive AI optimism persist, turning the recent market wobble

into something more seismic, financial stability risks from

plunging asset prices could force the Federal Reserve to cut

interest rates.

Until a few days ago, financial stability concerns typically

supported calls for the Fed to pause its easing cycle, not

continue it.

Cleveland Fed President Beth Hammack warned on Thursday that

further rate cuts "could come at the cost of heightened

financial stability risks", a sentiment echoed by Dallas Fed

President Lorie Logan the following day. Given how high U.S.

stock prices and how tight credit spreads have gotten, it's a

reasonable call.

But if the recent wave of equity selling and surge in

volatility persists, and financial conditions move in the

opposite direction, the calculus may change.

To be sure, this is not a base-case scenario. Traditionally, the

Fed would not step in to calm markets unless liquidity had

evaporated and market functioning was impaired. And while market

sentiment and performance have both crumbled, we're nowhere

close to crisis territory, especially after Friday's bounce.

But this time around, things may not need to get that bad

for the Fed to intervene. That's because, by many economists'

calculations and even some policymakers' admissions, the health

of the 'real' economy now depends on the wealth of Wall Street

more than ever.

WALL STREET IS MAIN STREET

The link between Wall Street performance and Main Street

activity has strengthened in recent years.

More than half of all U.S. households hold equities via

retirement and mutual funds, but the richest Americans own the

bulk of financial assets - the top 1% owns around half of the

stock market, and the top 10% owns around 90%.

These asset holders are responsible for a huge chunk of U.S.

economic activity. Estimates this year from Moody's Analytics

chief economist Mark Zandi suggest that as much as half of all

U.S. consumer spending comes from the top 10% of earners. There

has been some pushback against that figure. University of

Berkeley's Antoine Levy says it is closer to 35% of consumer

spending.

But, regardless, there's no disputing the fact that the rich

drive U.S. consumption, which accounts for up to 70% of the

country's economic activity.

You can see why policymakers would be keen to avert a rout

on Wall Street. Controlling asset prices is not part of the

Fed's mandate, of course, but ensuring financial stability and

the general wellbeing of the economy is - and the three

considerations are increasingly intermingled.

EYE OF THE STORM

Markets found their footing on Friday, but things were

looking much more ominous 24 hours before.

Stocks plunged on Thursday despite AI leader Nvidia ( NVDA ) reporting

bumper revenues and an even brighter outlook. Strategists at

Citi noted that the S&P 500's peak-to-close return that day was

-3.4%, in the top 95 percentile for such moves since 1996. It's

also the biggest decline since the 5.5% fall on April 8.

But there was a clear catalyst for the market's slump and

recovery in April: Trump's 'Liberation Day' tariffs and

subsequent roll back. What's more, there was plenty of room for

Wall Street's rebound to run, as stocks were around 20% off

their highs at the time.

That's not the case now. The S&P 500 and Nasdaq were only 5.5%

and 9% off their respective October 29 peaks at their lows on

Friday. With fund managers looking to lock in profits ahead of

year end, selling may have further room to run.

But here's the thing. The catalyst for Friday's bounce

appears to have been increased market bets of a Fed rate cut

next month following dovish remarks from New York Fed President

John Williams.

Chair Jerome Powell has made clear any further easing is

contingent on the labor market, and he would have cover - the

unemployment rate rose to a four-year high of 4.4% in September.

The recent market volatility, which we've likely not seen the

end of, may seal the deal.

(The opinions expressed here are those of the author, a

columnist for Reuters)

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(By Jamie McGeever; Editing by Chizu Nomiyama )