The Fed Has A New Favorite Code Noun Word: ‘Uncertainty’

There is suddenly a new word that appears again and again in remarks from the Federal Reserve’s top officials: “uncertainty.”

This week, Fed governor Adriana Kugler cited a “heightened level of uncertainty,” while St. Louis Fed president Alberto Musalem warned about “considerable uncertainty” in determining the effect President Trump’s tariffs will have on inflation.

The certainty of this widespread uncertainty for central bank policymakers was also on full display in the Fed’s quarterly Summary of Economic Projections released last Wednesday — even as officials maintained a prior prediction for two rate cuts at some point this year.

What Fed officials changed in those projections was their outlook on inflation (higher) and economic growth (lower), with Powell telling reporters that a driving reason for the change was uncertainty stemming from Trump’s plans for an aggressive slate of new tariffs.

“It’s hard to know with any precision how the economy will evolve,” Williams said last Friday, acknowledging “there is certain uncertainty in monetary policy.”

Another sign of uncertainty in the Summary of Economic Projections: Nearly all Fed officials said that risks to their unemployment forecasts were weighted to the upside and risks to their inflation forecasts were weighted to the downside.

In other words, most believe inflation could go higher and employment could go lower.

“The Fed is worried that the ongoing stagflation shock is going to intensify further,” Torsten Sløk, chief economist for Apollo, said in a March 25 note that cited the Summary of Economic Projections data. 

Fed policymakers are not the only ones going to the word “uncertainty” to describe their current predicament. The same is true in the business world, where companies have started using it when warning about lower profit and revenue forecasts.

FedEx (FDX) did so last week, with its CFO saying its “revised earnings outlook reflects continued weakness and uncertainty in the U.S. industrial economy.”

Another was Delta Air Lines (DAL), which said earlier this month that lower first quarter revenue and profit forecasts were the result of “increased macro uncertainty.”

American consumers also say they are experiencing increased uncertainty. The latest consumer confidence index reading from the Conference Board clocked in at the lowest level in more than four years amid uncertainty around President Trump’s policies.

Expectations were particularly dour when it came to inflation, with expectations rising to 6.2% in March, up from 5.8% in February.

CONSUMER EXPECTATIONS FOR THE ECONOMY HIT A 12-YEAR LOW

The Conference Board’s “Expectations Index” is based on consumers’ short-term outlook for income, business, and labor market conditions.

The hope from the business world and Wall Street is that next week could provide some clarity when on April 2 Trump releases a promised set of “reciprocal tariffs” on other countries.

There is even some optimism those tariffs may turn out to be more limited than once expected.

But for Fed policymakers, that may only lead to another period of uncertainty as they try to figure out how much of any additional inflation they expect to see is a one-off effect that will prove to be temporary.

Powell, for example, said last week that it was his “base case” that any price increases could prove to be “transitory.”

But the St. Louis Fed president, Musalem, said Wednesday that new tariffs could have a more persistent impact on inflation.

“I would be wary of assuming that the impact of tariff increases on inflation will be entirely temporary,” Musalem said during a speech in Kentucky.

“The direct price-level effects [of tariffs] are expected to have only a brief and limited impact on inflation, but the indirect effects could have a more persistent impact on inflation,” he added.

Musalem offered the example of beer from Canada. If it is subject to a 25% tariff, US consumers could shift out of Canadian beer to American-made Budweiser and then Budweiser could increase its prices as people look for locally produced goods.

“Distinguishing, especially in real-time, between direct, indirect, and second-round effects entails considerable uncertainty,” he added.

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