The Fed is still trying to combat the effects of the massive fiscal stimulus it launched in 2020 during the coronavirus pandemic, making it difficult to accurately assess the state of the economy, Smid, CEO of Smid Capital Management, told CNBC.
“The Fed is trying to fight a specter that is threatening the economy,” Smid added. “That specter is a massive amount of federal deficit spending, 7 percent of U.S. GDP, and it’s very hard to fight a problem like that that you didn’t create.”
“I think Powell is doing everything he can to understand this problem and address it with monetary policy… but it’s a fiscal problem, and this fiscal problem is not going away,” Smid said.
The US market continued its decline on Monday, with US futures leading European and Asian losses after a weaker-than-expected jobs report for July and a rise in the unemployment rate raised concerns that the US economy could enter a recession.
The CBOE Volatility or Fear 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 become concerned that the Federal Reserve has been too slow to cut interest rates after raising them to a range of 5.25% to 5.5% to combat inflation coming after the coronavirus pandemic era.
The U.S. central bank kept interest rates steady at its latest policy meeting last week, but markets are expecting it may now need to act more quickly and aggressively to prevent an economic slowdown, with interest rate futures pricing in a 70 percent chance of a 50 basis point cut in September, according to Reuters.
Smid said the latest inflation data, which showed consumer prices fell in June for the first time in four years, was a positive sign for markets – but he pointed to ongoing underlying problems.
He added that he now sees the United States entering a recession “at some point,” but noted that this would likely be driven by asset value losses resulting from the stock market crash.
Smid sees current Wall Street valuations as an example of the failure of the millennial-driven stock market.
The American investor warned of the possibility of a stock market collapse, because despite the current accommodative monetary policy, the Federal Reserve cannot save the market.
He said that the purchases that continued during the months of August and September represent a phenomenon that we have not seen in ten years.
“We’ve seen a surge in millennials and people who don’t want to own bonds but prefer to own shares of companies that are already overvalued in the market,” he continued.
The Fed will still face a significant challenge as it deals with additional inflationary pressures from the US election cycle and the potential for wider conflict in the Middle East, Smid noted.
“Is it likely that we will see a curb on our fiscal spending during this period?” he said of the election campaign. “The answer is no.”
“Whoever takes office, whether it’s Kamala Harris or Donald Trump, there’s going to be an interest in trying to support the economy,” he said.
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