Global markets continued to experience a massive sell-off amid concerns about an impending recession in the US, and the Federal Reserve may have little room to act, investor Cole Smead said on Monday.
Smead, who is the CEO of Smead Capital Management, told CNBC that the Fed is still trying to deal with the after effects of massive fiscal stimulus, which makes it difficult to accurately assess the state of the economy.
"The Fed is trying to fight the 'challenges' faced in several respects. The other is massive deficit spending by the federal government, 7% of US GDP, and it's very difficult to fight that kind of problem," Smead told CNBC.
"I think Powell is doing everything he can to understand the problem and fight it with monetary policy. But this is a fiscal problem, and the fiscal problem will not end," he said.
A massive market sell-off continued on Monday, with US futures reflecting losses in Europe and Asia after a weaker-than-expected July jobs report and a higher unemployment rate raised concerns that the US economy could be headed for recession.
The CBOE Volatility Index, also known as “VIX” a measure of expected market volatility, rose to 41.65, based on LSEG data, reaching its highest level since October 2020, as risk fears returned to the market.
Investors worry that the Fed is too slow to cut interest rates after raising them to a range between 5.25% and 5.5% to fight inflation from the Covid-19 era.
The US central bank kept interest rates steady at its policy meeting last week, but markets predicted it may need to act faster and tougher to prevent a downturn, with interest rate futures accounting for a 70% chance of a 50 basis point cut in September, according to Reuters .
Smead said the latest inflation data, which showed price increases fell in June for the first time in four years, was a positive signal for the market — but he noted that fundamental problems remained.
He said he now sees the US falling into recession "at some point," although he added this is more likely to be due to losses in asset values than stock market falls.
The Fed will continue to face challenges as it grapples with additional inflationary pressures from the US election cycle and the prospect of wider conflict in the Middle East, Smead said.
"Is it possible that we will reduce our fiscal spending in this period of time?" he said about the election campaign. "The answer is 'no.'"
"Whoever takes over, whether it's Kamala Harris or Donald Trump, will have an interest in trying to support anything," he said.
