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LOCATION STRATEGY CHARTBOOK

I know everyone always reads all the way through, but I put this at the top just in case. Some good news.

I feel like we’ve established a solid if unconventional case why the Fed should cut rates, and we still believe we will see some kind of rate cut this year because:

1. High interest rates have pushed bank’s hold to maturity assets underwater, threatening the health of the banking system at a scale that would be difficult to absorb

2. We have to refinance $14 trillion in federal debt in the next 12 months - the implications on the budget are staggering,

3. Highly indebted governments like high inflation because they are paying the debt back with dollars that are worth less than the dollars that were borrowed, and

4. This is the first time we’ve made this explicit: what is the point of imposing the pain of a hawkish monetary policy when the President is going to undo most of it with an aggressively hyperinflationary fiscal policy anyway?

Over the next few weeks we’re going to explore the implications of not cutting rates this year. To kick off the series, we were able to obtain an interview with Jared Berntstein, Chairman of the President’s Council of Economic Advisors. Bernstein was President Biden’s chief economics advisor as VP, he has been a chief economist in the Labor Department and is on the Congressional Budget Office advisory committee. He holds a Bachelor’s in Music and a PhD in Social Work. We’ve asked Chairman Bernstein to explain why we shouldn’t be concerned about rising federal debt levels:

A 150 bp rate cut reduces 2025’s interest payment on the federal debt by $500 billion. How much is $500 billion? That’s about what we spent on Veterans and on Transportation funding in 2023, combined.

The US budget deficit remains very wide.

Federal spending, revenue and deficits. We didn’t suddenly become prudent in 2024. It’s only 2 quarters worth of data. If you’d like to look at America’s finances in greater depth, the Treasury Dept has a great site: https://fiscaldata.treasury.gov/americas-finance-guide/

You can see fiscal policy undoing the effects of monetary policy in the recent rise in the PCE inflator:

Price trends for select grocery items in the US:

Yet like Sisyphus, the Fed continus pushing its boulder uphill. The fed funds rate trajectory has been repriced sharply higher in recent days.

The labor market continues to show signs of loosening, with the rate of job switching at its lowest since the COVID shock.

Last month’s real consumer spending topped expectations, marking the largest monthly gain in over a year.

The employment cost index (ECI) showed that growth in US labor costs accelerated in the first quarter, topping expectations

The FOMC is likely to revise its wage growth projections upward.

Still no solution for our top housing problem. The gap between home prices and US wages continues to widen.

The construction sector saw a sharp reduction in job openings

Here are the components of residential construction spending.

Mortgage applications continue to weaken relative to recent years.

Recent immigrants aren't forming households and are creating demand for multifamily housing.

Investment in office buildings faces some headwinds.

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