As recession fears intensify, an investor claims the Fed is attempting to combat an invisible enemy.

• The CEO of Smead Capital Management warned Monday that the Federal Reserve may have limited options to respond to the ongoing global market sell-off and the potential U.S. recession.
• Cole Smead stated that the Fed is attempting to combat the after effects of bumper fiscal stimulus in some respects, even though it is fighting a ghost in others.
• On Monday, the market rout continued, with U.S. futures reflecting losses in Europe and Asia following a weaker-than-expected jobs report for July.

The Federal Reserve may have limited options to respond to the global market sell-off and U.S. recession fears, according to investor Cole Smead.

Smead, CEO of Smead Capital Management, stated on CNBC that the Fed is still trying to manage the aftermath of the fiscal stimulus, which makes it challenging to accurately assess the economy's condition.

"CNBC's "Squawk Box Europe" reported that the Fed is attempting to combat a phantom issue in some ways. The phantom is a significant amount of federal spending on deficit, which accounts for 7% of U.S. GDP, making it challenging to address a problem that was not created."

"Jay Powell is doing his best to comprehend the issue and address it with monetary policy, but it's a fiscal problem, and it's not going away," he stated.

On Monday, the market rout continued as U.S. futures reflected losses in Europe and Asia following a weaker-than-anticipated jobs report for July and a higher unemployment rate, which sparked concerns about a possible recession in the U.S. economy.

The VIX, a measure of market volatility, increased to 41.65 and reached its highest level since October 2020 due to rising risk concerns.

Concerns among investors have increased that the Fed has not acted quickly enough to lower interest rates following their increase from 5.25% to 5.5% in an effort to control inflation resulting from the Covid-19 pandemic.

Last week, the U.S. central bank maintained its rates during its policy meeting, but markets anticipate that it may need to act more quickly and decisively to prevent an economic slowdown. According to Reuters, interest rate futures contracts indicate a 70% probability of a 50 basis point reduction in September.

The latest inflation data, which showed price rises dipped in June for the first time in four years, was a positive signal for markets, according to Smead. However, he pointed out that underlying issues remain.

He stated that the U.S. may experience a recession "at some point," but he believes it will primarily be caused by the decline in asset values resulting from the stock market crash.

Smead pointed out that the Fed will face challenges due to inflationary pressures from the U.S. election cycle and the possibility of conflict in the Middle East.

"Is it likely that we will control our spending during the election campaign?" he asked. "The answer is 'no'."

"Anyone who enters will have an interest in boosting whatever they can," he stated.