The Fed is just as confused as the rest of us

The most powerful institution in global finance is as completely and utterly confused as the rest of us.

- JONATHAN LEVIN

At its policy decision Wednesday, the Federal Reserve's rate-setting committee held rates at 4.25 per cent-4.5 per cent, but Chair Jerome Powell and his colleagues essentially acknowledged that they had no idea what would come next.

They couldn't precisely project where President Donald Trump's tariff rates would end up, much less how they would impact consumer inflation and the labour market. Nor could they confidently handicap jarring changes to immigration and fiscal policies and the evolving war between Israel and Iran. The big risk, of course, is that the uncertainty and indecision will make the Fed late to arrest a potential increase in unemployment.

In the Summary of Economic Projections, the median member of the Federal Open Market Committee pencilled in two rate cuts this year. But that "base case" constitutes a massive oversimplification of the outlook, and some investors may be underestimating just how fat the tails are in the distribution of potential outcomes, even over just the next three or four months. Of the 19 respondents, 14 policymakers thought the risks to their inflation forecasts were weighted to the upside — the same number that thought as much about the risks to their unemployment projections.