The Federal Reserve is the central bank of the United States, blindfolded. This is the most important gain from its policy announcement last week.
On the predictable side, the Fed kept its policy interest rate in the range of 4.25-4.5%, while the interest rate setting committee promised to slow down its pace of allowing securities to be able to abandon their balance sheets.
FED participants only cleverly updated their baseline economic forecast for 2025, showing a 2.7% PCE inflation (2.5% for the December outlook), an unemployment rate of 4.4% (versus 4.3%) and a 1.7% increase in GDP (versus 2.1%). These forecasts indicate a 50 basis points lower this year, which is unchanged from previous estimates.
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But the most shocking development is the number of Fed board members and Fed presidents who report that their perceptions of U.S. unemployment, inflation and GDP have increased uncertainty.
Now, 16 of 16 respondents said that over the past two decades, their unemployment forecasts have been higher than typical predicted uncertainty levels. Seventeen respondents said their inflation forecasts were the same, and 17 respondents said uncertainty in GDP increased.
This combination of uncertainty is rare and is very concerned in itself. It should lead financial markets to make money through broader credit spreads and lower prices to demand higher quality of risk.
The Fed has published a projection survey for a decade and a half years, and the only other similar period fell between 2020 and early 2023, between 2020 and early 2023, which saw this at the same time.
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What makes economic forecasts so unstable? Overall, U.S. President Donald Trump has arbitrarily engaged in a global trade war and has also dispersed the government’s methods of layoffs. These include Elon Musk’s government efficiency ministry, which has led to government layoffs and spending cuts, which has raised some legal challenges. How these moves will affect the U.S. private sector.
Regarding tariffs, the latter is working to understand the logic and legal basis behind Trump’s so-called reciprocity tariff plan, which is scheduled for April 2. Trump said the policy would lead to U.S. tariffs on countries with tariffs, VAT and other non-TV barriers, which he believes are harming U.S. producers.
But, like other elements of Trump’s economic agenda, policy makers cannot determine which parts of the plan will withstand legal scrutiny. Nor can they distinguish “negotiation strategies” from tariffs designed to remain in place for a long time. If they can figure out these things, they need to decide next how businesses and families absorb higher prices.
Will tariffs mainly lead to a shrinking profit margin, or will the company pass on costs to consumers? Will consumers grit their teeth and pay more, or will they reduce their spending?
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A prominent view suggests that tariffs constitute a form of supply shock, and that monetary policy authorities should “browse” them – effectively, they should ignore such one-time adjustments. The stability of the Fed’s forecast shows that it is leaning towards doing so. However, Fed Chairman Jerome Powell said there are many cross-currents that affect the outlook. When it comes to the forecast of changing prices in “this highly uncertain environment,” he said: “I think there is a degree of inertia and you just say ‘maybe I’ll stay with me.'”
But opinions vary. A model-based analysis by economists at the Federal Reserve Bank of Minneapolis and the University of Wisconsin-Madison recently showed that the best policy response is to stimulate the economy by cutting speeds. Indeed, this is what the Fed did after the last round of tariff escape in 2019. Others say it depends entirely on revenge in other countries and whether domestic inflation expectations have increased.
There is evidence that consumer inflation expectations are indeed rising, as David Wilcox, a former senior adviser to Bloomberg Economics’ head of U.S. research and former senior adviser to the top three Fed chairs, wrote last week.
So, how do you deal with a combination of these facts? If you are a central bank in the United States, you may continue to do nothing and wait for more information.
Unfortunately, this means that it may be too late when the decision makers finally shake the action. ©Bloomberg
