Fed’s Next Moves Under Scrutiny as Recession Fears Mount

Wall Street investors are keeping a close eye on the Federal Reserve’s next moves, with some worried that the central bank may be too slow in cutting interest rates to prevent a recession or bear market. Recent market volatility and mixed economic signals have heightened these concerns.

Market Rollercoaster Ride

The S&P 500 recently experienced its worst day since 2022, followed by its best day since 2022 in the same week. Despite this turbulence, the index ended the week down less than 0.1%, suggesting some stabilization.

However, veteran investor David Roche warns of potential trouble ahead:

“I think [a bear market] is probably coming, but probably in 2025. We now know what will cause it,” Roche told CNBC’s “Squawk Box Asia”.

Factors Contributing to Market Concerns

1. Interest Rate Expectations: Roche expects the Fed to resist reducing rates to the market’s desired 3.50%, potentially disappointing investors.
2. Economic Slowdown: “The second thing is that profits [won’t] fulfill expectations, because the economy is going to be slowing,” Roche cautioned.
3. AI Bubble: Roche believes the AI sector has “entered bubble terrain decisively,” which could contribute to slower economic growth.
4. Fiscal Policy: Cole Smead, CEO of Smead Capital Management, points to ongoingjames fiscal spending as a complicating factor: “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”.

Recession Fears and Fed Response

A weaker-than-expected July jobs report has fueled concerns about a potential recession. The Cboe Volatility Index (VIX) jumped to its highest level since October 2020, indicating increased market anxiety.

Investors are now speculating that the Fed may need to act more aggressively to prevent a downturn. Interest rate futures contracts are pricing in a 70% chance of a 50 basis-point cut in September, according to Reuters.

Looking Ahead

While some investors fear a recession or bear market, others see potential for Fed intervention if conditions worsen. As Roche notes, “The likelihood is [that] the Fed has plenty of room to cut rates if things turn out worse than expected, and it has repeatedly said so”.

With the 2024 U.S. election cycle approaching and potential geopolitical tensions, the Fed faces a complex balancing act in the months ahead.