The Federal Reserve is trying to "fight the ghosts"
The Federal Reserve is trying to deal with the follow-up effects of massive fiscal stimulus, making it difficult to accurately assess the economic situation. The market is concerned that the US economy may fall into a recession, with investors increasingly worried that the Fed's rate cuts are too slow. Smith believes that the US may fall into a recession, mainly due to asset value losses caused by the stock market decline. He believes that the Fed will continue to face challenges due to inflation pressures brought by the election cycle and the prospect of larger conflicts in the Middle East. Whether Harris or Trump is elected, the next president will take measures to support the economy or implement specific political agendas. Stock index futures are falling, with the market predicting a higher likelihood of rate cuts
Cole Smead, CEO of Smead Capital Management, warned on Monday that the Federal Reserve is still struggling to deal with the aftermath of massive fiscal stimulus, making it difficult to accurately assess the economic situation.
Smead said in an interview, "To some extent, the Federal Reserve is trying to combat a ghost, which is the huge federal deficit spending that accounts for 7% of the U.S. GDP." He added, "It is difficult for the Federal Reserve to counteract a problem that it did not cause."
He stated, "I think Powell is doing his best to understand this issue and combat it with monetary policy. But this is a fiscal issue, and this fiscal issue is not over yet."
The market continued its sharp decline on Monday as the U.S. July jobs report fell below expectations, with rising unemployment rates sparking concerns that the U.S. economy may be heading into a recession, causing U.S. stock index futures to fall along with European and Asian stock markets.
According to London Stock Exchange data, with risk concerns returning to the market, the Chicago Board Options Exchange Volatility Index (VIX), which measures market expected volatility, surged to 41.65, reaching its highest level since October 2020.
"Investors are increasingly worried that the Federal Reserve's rate cuts are too slow," Smead said.
Last week, the Federal Reserve kept interest rates unchanged at its latest policy meeting, but the market now predicts that it may need to act faster and more decisively to prevent an economic downturn. According to Reuters, interest rate futures contracts indicate a 70% chance of a 50 basis point rate cut in September.
Smead noted that the latest inflation data showed a month-on-month decline in inflation for the first time in four years. While this is a positive signal for the market, he pointed out that the fundamental problem still exists. He said he now believes the U.S. "will enter a recession at some point," but added that "it is more likely to be caused by asset value losses due to stock market declines."
Smead pointed out that the Federal Reserve will continue to face challenges due to additional inflation pressures brought by the U.S. election cycle and the prospect of larger conflicts in the Middle East.
Referring to the election campaign, he asked, "Can we control our fiscal spending in the short term? The answer is no."
He said, "Whether it's Harris or Trump who is elected, the next president will take measures to support the economy or implement specific political agendas."