The Fed is trying to 'fight a ghost' as recession fears mount, investor says

LONDON — As a global market sell-off continues amid fears of a looming U.S. recession, the Federal Reserve may have little room for manoeuvre, investor Cole Smead warned Monday.

Smead, who is CEO of Smead Capital Management, told CNBC that the Fed is still attempting to combat the after effects of bumper fiscal stimulus, which have made it difficult to accurately gauge the state of the economy.

"The Fed is trying to fight a ghost in some respects. The ghost is a massive amount of federal spending on deficit, 7% of U.S. GDP, and it's very hard to counteract a problem like that, that you didn't create," Smead told CNBC's "Squawk Box Europe."

"I think Jay Powell is doing all he can to understand that problem and counteract it with monetary policy. But it's a fiscal problem, and that fiscal problem's not ending," he said.

The market rout extended on Monday, with U.S. futures mirroring losses in Europe and Asia after a weaker-than-anticipated jobs report for July and a higher unemployment rate ignited worries that the U.S. economy could be falling into a recession.

The Cboe Volatility Index, also known as the "VIX" — a measure of expected market volatility — jumped to 41.65, according to LSEG data, hitting its highest level since October 2020, as risk fears returned to the market.

Investors have grown concerned that the Fed has been too slow to cut interest rates after hiking them in a range between 5.25% and 5.5% to combat inflation from the Covid-19 era.

The U.S. central bank held rates steady at its latest policy meeting last week, but markets are predicting that it may now need to more faster and more firmly to prevent a downturn, with interest rate futures contracts pricing in a 70% chance of a 50 basis-point cut in September,