Nasdaq Plummets 2% Amid Rate Freeze Fears in New York

Although the U.S. federal government concluded the 43-day shutdown (a temporary halt in operations), the New York stock market experienced a...

Although the U.S. federal government concluded the 43-day shutdown (a temporary halt in operations), the New York stock market experienced a broad decline. The technology-focused Nasdaq index fell by more than 2%, continuing its recent downward trend. Market participants seemed affected by worries that stock prices of artificial intelligence (AI)-related firms are inflated, along with predictions that the Federal Reserve (Fed) will maintain the key interest rate steady next month.

Worries about the high valuation of artificial intelligence-related shares

On the 13th (local time), all three major New York stock indices experienced a decrease. The Dow Jones Industrial Average dropped 1.65%, the S&P 500 Index fell 1.66%, and the Nasdaq Composite Index declined by 2.29%. This was the third instance in two weeks that the S&P 500 fell by more than 1%, a significant change from the previous three months, during which it had only once dropped by over 1%.

A widespread decline in major technology stocks pulled down the Nasdaq. NVIDIA decreased by 3.58%, Tesla fell by 6.64%, AMD dropped 4.22%, Amazon slid 2.71%, Microsoft declined 1.54%, Broadcom fell 4.29%, and Alphabet dropped 2.89%. The U.S. financial news platform CNBC stated, “Investors kept selling tech stocks due to worries about the valuation of AI-related shares.” Tech stocks had risen more than 50% from April until the end of last month. Kevin Gordon, head of macroeconomic research at Charles Schwab, told the Financial Times, “Overvalued markets often face challenges when anxiety arises,” and noted, “This is a part of the market's adjustment process.”

Increased demands inside the Fed for a 'rate hold'

The overall drop in the market was also influenced by increasing expectations that the Federal Open Market Committee (FOMC), which will meet on September 9–10, will maintain interest rates at their current level. In September, the Fed indicated through its dot plot that two more rate reductions—possibly in October and December—could occur. However, as the economy has shown greater strength than anticipated, there is now more discussion about the possibility of the Fed changing its approach. Alberto Musalem, president of the St. Louis Fed, who will have a vote in the upcoming meeting, mentioned at a public event, “We should be careful and proceed with caution when considering rate cuts.” Beth Hammack, president of the Cleveland Fed, also noted, “To sustain a tight monetary policy, it is important to keep the benchmark rate unchanged.” Although she does not have a voting role in this meeting, her comments are significant since she will gain voting rights next year.

Similar remarks were made the day before. Susan Collins, president of the Boston Fed and a voting member in the rate-setting meeting, stated, “In this very uncertain situation, it would be suitable to keep the policy rate at its present level for a while to balance inflation and employment risks.” Raphael Bostic, president of the Atlanta Fed, who is not a voter, also said, “Although there has been a slowdown in the labor market, the more immediate and significant risk to the economy continues to be price stability,” showing the Fed's increasing hesitation regarding rate reductions.

This ambiguity was worsened by the federal government shutdown. The 43-day shutdown caused delays in the publication of important economic reports, such as the October employment data and inflation numbers. Wall Street has described this scenario as "flying blind," increasing worries about the uncertainty. Markets have slowly adjusted their expectations regarding rate reductions. The CME FedWatch Tool, an American interest rate forecasting model, indicated that although expectations for a 0.25 percentage point rate reduction had surpassed 60% just last week, they dropped significantly to 51.9% on that day.