Location Strategy Chartbook 04.19.25

“These are very fundamental policy changes,” Powell said at an event hosted by the Economic Club of Chicago. “There isn’t a modern experience of how to think about this.”

Powell said “the level of the tariff increases announced so far is significantly larger than anticipated” and that the lingering uncertainty around tariffs could inflict lasting economic damage. With Trump’s tariffs putting the economy on a path toward weaker growth, higher unemployment and faster inflation — all at the same time — the Fed is also facing a situation it hasn’t dealt with in about half a century.

As a result of the tariffs that Trump has enacted, with likely more to come, “unemployment is likely to go up as the economy slows,” Powell said.

“In all likelihood,” inflation is likely to go up as well, he said. That is to say that a portion of the burden of tariffs is going to be “paid by the public.”

It’s all but certain that prices will rise from tariffs, Powell said, but it’s still a question as to whether that will cause overall inflation levels to accelerate and to what extent.

The Fed slowed the pace of its balance-sheet runoff at its March policy meeting, a move that can work to lower long-term bond yields and led some watchers of the central bank to speculate that policymakers were worried about the amount of liquidity available in the market.

That wasn’t the case, Powell said on Wednesday. “We think reserves are still abundant, " he said. “We don’t think we’re close to a point where we would stop” scaling back the bank’s balance sheet by choosing not to reinvest the money as existing bondholdings mature.

The Fed’s March move was in response to an event involving the Treasury and debt ceiling that “shielded” the Fed from being able to see the impacts of quantitative tightening on its reserves, explained Powell. In response, the Fed slowed its pace.

That ended up being a good thing, said Powell. “The slower we go, the smaller the balance sheet can get without disruptions,” he said.

WSJ: The White House started a high-stakes tariff game. Is it just figuring out all of the rules?

During past shocks—even those directly affecting America like the 9/11 terror attacks and S&P’s debt-rating downgrade in 2011—investors flocked to the safety of U.S. government debt. Now the opposite seems to be happening.

Some have speculated that China, with about $750 billion of Treasurys, deliberately hurt their value. That seems unlikely, but what spooked the market is beside the point: A continued bond and dollar selloff could be costly for China but worse for America.

Less need to recycle dollars and less faith in U.S. assets means higher mortgage rates, an erosion of the premium valuation that American stocks enjoyed and a rising cost of living, even without tariffs. American companies would pay more to borrow, pinching profits.

Last week’s selloff in US Treasuries notwithstanding, 10-year yields are well below their peak levels hit in mid-January, thanks in part to diminished expectations for economic growth this year. Lower rates would suggest relief for the federal government with respect to its interest bill. But this isn’t a good trade-off.

Torsten Slok, Apollo Global Management Inc.’s chief economist, highlighted in a note to clients Wednesday that economic downturns do more damage to the government’s budget than can make up for the interest-cost savings from lower yields. Let’s say interest rates drop by 2 percentage points (five-year Treasury yields are currently just under 4%). That would save around $500 billion in annual interest, Slok says.

WSJ: The Post-Covid Era of Ultra-Calm Markets Is Over

Stocks steadily marched higher for much of the past two years, clinching dozens of records. Selloffs were brief and infrequent: Last year, the S&P 500 completed a 356-session streak without a daily decline of 2% or more, its best such stretch since one that ended in February 2007. Those happy times are over.

Bloomberg: Only three times has the Philly Fed Manufacturing Survey plunged more in a month. Twice in spring 2020, and once in October 2008

NY Fed: Dismal expectations for the economy in the NY Fed's survey of regional manufacturers.

All indicators -new orders, employment are going down, with the exception of prices (received, and paid) which are going up.

Last month, small business uncertainty was high, but they remained relatively optimistic despite this, according to the National Federation of Independent Business (NFIB). But now, it appears the rise in uncertainty is beginning to weigh on business optimism.

Small business optimism has fallen from the December high and is below the 51-year average in March. Bank of America small business loans grew 8% year-over-year (YoY) in the first quarter of 2025. However, net charge-offs were also up, and NFIB real sales expectations fell significantly in March, highlighting small firms’ views about the market outlook.

Bloomberg: The Federal Reserve faces the prospect of a false sense of security about the economy’s resilience in coming months due to efforts by the Trump administration to remove work authorizations from, and outright deport, hundreds of thousands of people.

That’s how LHMeyer economists see it, estimating that up to about 2.25 million members of the US workforce “could be subtracted” as a result of policy changes. That might then leave the unemployment rate flat, or even falling, in a way that masks a weakening in the underlying economy, according to the team, led by ex-Fed Governor Larry Meyer.

KB Home CEO: The start to the spring selling season is 'more muted' than usual

“Demand at the start of this spring’s selling season was more muted than what we have seen historically, despite a healthy level of traffic in our communities. In mid-February, we took steps to reposition our communities to offer the most compelling value, and buyers responded favorably to these adjustments,” wrote Jeffrey Mezger, CEO of KB Home, in their earnings report.

Costar: National demand for senior living facilities reached an all-time high in the first quarter as more Americans enter their peak retirement years, a new industry report shows.

The average U.S. senior living occupancy rate increased to 87.4% in the first three months of 2025, up from 87.1% in the fourth quarter of 2024, according to the latest survey from the National Investment Center for Seniors Housing & Care.

The higher occupancy numbers come as senior housing construction starts have fallen across the country in recent years, even as a rising number of baby boomers enter retirement. Construction during the first quarter in the 31 cities tracked by the group hit its lowest level since 2009 during the global financial crisis, according to the data.

Units lost to senior living closures, including facilities being converted to other uses, outpaced the number of units opened by developers in several cities in the first quarter.