Good morning, investors. Iran is preparing for war with the US, according to multiple reports and news sources.

The two nations have been working to reach a nuclear deal, but that hasn’t happened yet, as of this writing.

Our team is monitoring the situation closely and will have more reporting on it over the coming days.

This morning, we are unpacking the Fed’s new interest in prediction markets.

The Federal Reserve seems to be tired of driving with only a rearview mirror.

A new working paper from Fed economists argues that Kalshi, the only US-regulated prediction market, provides a faster and potentially more accurate read on inflation, growth, unemployment and interest rates than traditional sources and surveys.

To be clear, the conclusion itself is not surprising.

It’s the fact that it came from the central bank.

Policymakers have always relied on infrequent surveys and economic releases that are backward-looking and often revised months later.

Even their market-based tools like fed funds futures require mental gymnastics and assumptions.

Broadly speaking, the Fed has built its reputation acting on stale data.

For researchers to concede that prediction markets “offer a new market-based approach to measuring macroeconomic expectations in real-time” marks a step toward a new era of monetary policy.

Indeed, according to the paper, Kalshi forecasts for core inflation and unemployment data matched the consensus of Bloomberg economists.

For headline CPI, Kalshi actually provided a “statistically significant improvement” over Bloomberg’s forecasts.

“Kalshi markets provide a high-frequency, continuously updated, distributionally rich benchmark that is valuable to both researchers and policymakers,” the authors wrote.

That endorsement suggests that the Fed — which has been under fire from President Trump for being late on cutting interest rates — is actively working to implement modern, real-time indicators like the rest of the investment world.

Should prediction markets become part of policymakers’ tool box, investors could find themselves suddenly operating within a monetary policy landscape without a lag.

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📊Stock pickers are looking to capitalize on the latest sell-off. A growing chorus on Wall Street sees the AI-inspired drawdown as a buying opportunity, given that earnings haven’t changed and capital spending plans continues to ramp up. (Bloomberg)

🏦 January Fed minutes show a divided central bank. Several policymakers want rates to come down, though others believe “higher for longer” is still the right call until inflation eases further. (Barron’s)

🌍 US stocks are lagging global markets. In fact, this is the worst start against other countries since 1995, with investors increasingly opting for non-US exposure amid geopolitical uncertainty and currency volatility. (Yahoo Finance)

🗓 February 19, 2020: The S&P 500 closed at 3,386.15 to mark the near-term high before the sharp COVID-19 crash, when the index fell 34% to its March 23 low.

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