Home / Markets News & Opinions / Even the Fed’s Desperate Reassurance Isn’t Saving the Nasdaq Correction

Even the Fed’s Desperate Reassurance Isn’t Saving the Nasdaq Correction

Published September 24, 2020 3:08 PM
Joseph Young
Published September 24, 2020 3:08 PM
  • Fed Vice Chair Richard Clarida said the central bank would retain low interest rates and let inflation run higher than 2% at times.
  • The Fed’s reassurance isn’t helping the Nasdaq, which has declined by 11.8% since September 2.
  • Investors remain rattled by the pandemic-induced correction despite the Fed’s dovish stance.

Federal Reserve Vice Chairman Richard Clarida reaffirmed the central bank’s stance on keeping interest rates at record lows. The Fed’s reassurance doesn’t appear to be soothing investors as the Nasdaq Composite continues to plunge. 

Tech-heavy stock indices have recorded the sharpest drop in the recent market drought , with the Nasdaq declining 11.8% since September 2.

The performance of the Nasdaq Composite over the past three months. | Source: Yahoo Finance 

Is the Fed’s Arsenal Running Out? Nasdaq Continues to Slump

During an interview with Tom Keene on “Bloomberg Surveillance,” Clarida shared discussions at the Fed’s latest meeting. , especially around interest rates:

We gave some very significant forward guidance in our meeting recently. What we said is that we expect we are going to keep rates at the current level, which is basically at zero, until we have reached maximum employment and until inflation has reached 2%. So lower for longer and we have given some observable metrics that will indicate when that lift-off can happen.

Clarida emphasized that the Fed would maintain interest rates until employment fully recovers.

The U.S. unemployment rate hovers at 8.4%. | Source: The Bureau of Labor Statistics 

For the U.S. stock market, the Fed’s dovish stance is typically a highly optimistic factor. The Nasdaq and the S&P 500 saw rapid recovery from March to August based on relaxed financial conditions.

But the market’s latest reaction indicates that pandemic-induced fear has become too intense. Even the Fed’s reassurance is failing to tame market volatility.

The Nasdaq has seen a particularly steep correction due to plunging tech stocks.

Big Tech buoyed the U.S. stock market in the second quarter with blockbuster performances. In recent weeks, Big Tech has been the most significant catalyst for the Nasdaq Composite’s underwhelming performance. 

After weeks of struggle, Apple, Microsoft, Alphabet, and Amazon pulled back further on Wednesday. Apple’s stock dropped by 4.2% despite strong fundamentals  and expectations for strong Q4 performance.

The market’s slump is particularly concerning given the favorable macro backdrop (i.e., the Fed’s willingness to keep rates anchored at zero for years). Yet, investors remain cautious and reluctant due to the uncertainty around the pandemic.

One factor to consider regarding the Nasdaq’s performance is the U.S. dollar. Watch the video below:

Fed Vice Chair Reaffirms New Inflation Policy

Before Fed Chair Jerome Powell gave his Jackson Hole speech , strategists doubted the central bank’s ability to keep rates ultra-low.

But according to Clarida, central bankers “actually want to spend some time above and below 2% inflation” and would not consider raising rates until cost pressures increase dramatically:

We expect the rates will be at the current level until actual observed PCE inflation has reached 2%. That’s at least. We could actually keep rates at this level beyond that, but we are not going to even begin thinking about lifting off until we get observed inflation equal to 2%.

The financial conditions the Fed has laid out  are undoubtedly favorable for the markets. In the wake of the second wave of the pandemic, it seems even the Fed’s decisive actions can’t revert investor confidence.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com.