As global markets undergo sell-offs resulting from fears of impending U.S. recession, the Federal Reserve may have restrictions on its actions, According to Cole Smead, CEO at Smead Capital Management.
In an interview with CNBC’s “Squawk Box Europe,” he said that that Fed is still dealing with aftermaths of significant fiscal stimulus, hindering accurate identification of the states’ economy. “In some respects, the Fed is trying to fight a ghost,” he said.
This was a reference to the fact that it is difficult to counter the effects of massive federal spending that amounted to 7 percent of America’s Gross Domestic Product.
US futures down-curved on Monday in tandem with losses in Europe and Asia after a report showed job numbers for July were below expectations and that unemployment rates shot up hence sparking recession fears in respect of US economy.
The volatility index of CBOE, which is also known as VIX went up to 41.65 indicating a high level of market volatility since October 2020. Investors are fearing that the Federal Reserve has taken too long to cut interest rates after raising them to tame inflation.
Smead believes that the recent inflation data, showing a decrease in price rises for the first time in four years is good news for markets. However, he observes that underlying issues still exist and predicts a recession in America “at some point” likely triggered by declining asset values from the stock exchange.
The Fed is facing other challenges such as inflationary pressures emerging from US elections cycle. Smead doubts that it is possible to keep fiscal spending under control during election campaigns, no matter who wins. “Whoever comes into power, whether it be Kamala Harris or Donald Trump will have to seek ways of keeping things afloat” and asserts that both candidates will focus more on economic development than discipline.
Additionally, Smead points out that with elections come higher government expenditure, thus further exacerbating already existing inflationary tendencies.
“When it comes to decisions made by Fed regarding their actions in combating inflation then US election cycle counts a lot” he said. “In an election year central bank would have to combine between fighting stubborn inflation with political realities.”
