Patrick O'Meara

Kansas City Federal Reserve’s Economic Policy Symposium at Jackson Hole: Some matter, others don’t Read the complete analysis at https://lnkd.in/e9SvVHRV Following an unexpectedly dovish speech by Fed Chair Powell at Friday's Symposium, in our opinion, the rate path is now beholden to two major drivers: - First, the inflation trajectory which faces several crosscurrents including the length and depth of tariff impact, firming services inflation, and a softening housing market. Softening shelter inflation could possibly offset some of the upward price pressures - Second, the composition of the Board of Governors with 1) the eventual departure of Chair Powell, 2) the Nomination of Stephen Miran and 3) the outcome of the legal skirmish involving Lisa Cook - An overly aggressive easing cycle will have us refocused on inflation.   The Kansas City Fed's Economic Symposium has been held annually since 1978. The conference moved to Jackson Hole, Wyoming in 1982 and has been held there ever since, mostly at the Jackson Lake Lodge in Grand Teton National Park. Every August about 120 attendees gather to discuss topical academic papers. Attendees consist of Central Bankers, Academics, Journalists and some financial industry participants.   The conference is generally held over three days, covering 5-7 panel discussions focused on selected research papers, but investors only tune for the Opening Remarks by the Fed Chair, which are publicly broadcast. The empirical evidence based on market reaction data we examined over the past 20 years (Tables 1 and 2) shows a clear pattern: Fed Chair speeches significantly impact markets when economic uncertainty is elevated or when the economy is at a critical inflection point.   On some occasions, like in 2013 and 2015, the Fed Chair did not even speak. On other occasions markets responded vigorously: - 2010: Bernanke’s suggestion about QE2 drove S&P +9.7% (from 1,047), HY spreads -52bps (from 676bps) and the curve steepened with 2Y UST -8bps (from 0.52%) and 10Y UST +13bps (from 2.48%) over the following month - 2022: Powell’s 9-minute hawkish pivot after the post-pandemic, fiscal stimulus on steroids driven inflation drove S&P -12% (from 4,199), HY spreads +66bps (from 446bps) and the curve bear flattened with 2Y UST +84bps (from 3.37%) and 10Y UST +67bps (from 3.02%) over the following month. Our August 2022 investor letter: Antifragile Labor Market vs. Resolute Fed, discussed Powell’s speech and the ensuing tightening cycle and attempt to tame inflation. Our complete analysis is at https://lnkd.in/e9SvVHRV

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4Q25 US GDP saw an outsized negative contribution (-0.9pp qoq, non-annualized) from government spending, reflecting the prolonged federal government shutdown. Absent that drag, headline growth would have surprised to the upside (all else equal, 1Q25 forecasts are likely to be revised sharply higher to account for the payback). The US economy continues to expand at roughly a 2.5% annual pace, leading the developed world by a wide margin.

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“Despite risks of rising consumer inflation in the next few months, consumers have well-anchored expectations that tariff inflation will be temporary, and that conditions should improve by the time we enter 2026,” said Jeffrey Roach, chief economist at LPL Financial tells CNBC. “Inflation expectation is an important factor for the Fed and according to this report, the trajectory looks encouraging.” https://lnkd.in/gsr4RMeV LPL Financial

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Useful detail from the Federal Reserve Bank of Richmond on the US labor market, which is showing signs of softening. The challenge is that inflation data are also problematic - core PCE looks likely to have edged further away from the 2% target. The Bank of England’s latest policy meeting gives an example of how the Fed meeting in September may go: prolonged debate and voting and a very divided committee to get to a decision to cut 25bps. https://lnkd.in/gUDwUWKQ

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“Underwriting in Chicago is easier than in a lot of other markets,” says Matt Katsaros, founder of Wildwood Investments Limited. “Especially when you’re local and you know the players, you can quantify risk a bit easier.” Wildwood Investments has carved a niche in Chicago’s premier neighborhoods by developing midsized multifamily properties of 30 to 100 units. Tune in to the Real Estate for Breakfast podcast for Matt's conversation with McGuireWoods LLP partner and host Phillip Coover about the advantages of having #construction and #finance expertise in-house and the challenges and opportunities in Chicago’s limited-supply market. https://lnkd.in/ePa9yTbb #realestate #RealEstateForBreakfast

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Chicago’s anchors and philanthropy are choosing to fund intermediaries as “community quarterbacks,” doing it patiently and with enough resources to actually move the needle. Two live examples are West Side United’s food-system market formation and Community Desk Chicago’s community-owned real estate work. Why Community Quarterbacks Matter If you want durable change, don’t just fund projects—fund the people and platforms that line up capital, partners, and execution over years. This is the “community quarterback” idea that David Erickson and colleagues elevated in the Fed’s community-development work: a local entity coordinating cross-sector players, keeping score, and adjusting plays as conditions change. It’s not flashy, but it’s the best design we have for complex, place-based problems. Highlighting that will be one focus of Neighborhood Economics in Chicago Sept. 30-31 October 1. https://lnkd.in/e4vKzSpU

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According to the US Census, in the last 10 years, the gap between Michigan’s median household income and the national average grew from $3,800 to $9,000. To be “average” is not an aspiration most shoot for. But in terms of household income, the national average is steadily pulling away. We are seeing absolute gains in Michigan, but we are facing a widening gap. In other words, our growth trails the nation. How do we start to close it? Instead of first looking for "out-of-state" businesses to come in here and save us, it’s time to double down on the businesses already here. When we make Michigan the best place to start and grow a small business, we start fix the problem at the source. The success and benefits to customers, employees, owners, and investors tends to concentrated at home, not widely disbursed elsewhere. The case is clear. • Localized Growth: Small businesses create about half of Michigan's private-sector jobs. They aren't just participants in the economy; they are the engine. • Retaining Wealth: Profits and income from locally owned businesses stay in-state, compounding locally rather than being exported. • Resilient Communities: A business owner who lives in the community is far more likely to make decisions based on the long-term health of that community than outside interests. Closing the $9,000 household income gap starts by ensuring our homegrown businesses have the environment they need to grow.

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The FOMC lowered their policy rate by 25 bps on Wednesday as expected, but the hawks pushed back against another cut at the December meeting. In response, short rate markets repriced the odds of a December cut from 100% to 65%. The Fed also announced that they will stop shrinking their balance sheet on December 1. We’ll keep an eye on funding conditions through year end, but at this point in the process, the Fed has managed their second attempt at QT more adroitly than their first. Read more here: https://lnkd.in/gCvqXkBY #NISA #ChiefEconomistUpdates

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Policy and structural improvements in EM make them less dependent on the Fed, but not all EMs can ignore the Fed completely. Specifically, Mexico’s central bank might need to pay more attention to the policy rate differential with the Fed in H2 when calibrating its reaction function and setting the pace of easing. Several factors – including low inflation (today’s bi-weekly prints surprised to the downside), FX stability, and softening growth – argue for additional policy easing going forward. The market, however, errs on the cautious side, pricing in only on small (25bps) rate cut in the next 6 months, which will keep the real policy rate (adjusted by expected inflation) above the central bank’s neutral estimate (1.6-3.8%). One reason for caution is that Mexico’s policy rate differential with the Fed is getting close to historical lows, and it is not entirely clear how the currency or local rates will respond in the case of more aggressive rate cuts. Chart source: VanEck Research; Bloomberg LP

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Another step backward: "The budget also proposes restructuring the Community Development Financial Institution (CDFI) Fund into the Rural Community Development Fund. The new structure omits a Native-specific set-aside: where the budget lists a total of $51 million for Native CDFIs in fiscal 2024 and 2025, the proposed 2026 budget eliminates this funding."

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