The Fed's message to investors needs to be much clearer when the data is so cloudy

By Craig Torres and Fabio Natalucci

U.S. central bank should do more to help Americans navigate this unfamiliar and unpredictable economy

The Federal Reserve and its chair, Jerome Powell, need to guide investors through current economic conditions that Powell has described as offering "no risk-free paths."

The U.S. economy is undergoing multiple regime shifts simultaneously. Given the rapidly changing economic and financial landscape, investors need to be wary of becoming overly dependent on the Federal Reserve's guidance on interest rates.

The upending of the international order of trade and finance, the wrenching down of immigration flows, mercantilist trade policies and the U.S. government's increasing interest in the economic affairs of leading U.S. companies could serve as impediments to growth while keeping inflation above the Fed's 2% target.

At the same time, financial deregulation, the diffusion of artificial intelligence into business processes, and innovations in payments and digital finance could all boost profits and productivity, though how quickly this happens is still unclear.

Signaling a steady rate-cutting path when the economy is still adjusting to significant trade- and immigration-policy changes comes with significant risks for investors.

Inflation has been above the Federal Reserve's target for more than four years. Most of the gauges on the Atlanta Fed's underlying inflation dashboard are higher than ranges consistent with a 2% annual inflation rate.

Signaling a steady rate-cutting path when the economy is still adjusting to significant trade- and immigration-policy changes comes with significant risks for investors. The forward rate curve could abruptly flatten if inflation turns out to be stubbornly high, with significant implications for risk asset prices given already elevated valuations.

"The economy hasn't fully absorbed the cost of trade and immigration policy," said Michael Gapen, chief U.S. economist at Morgan Stanley & Co. "Corporates have largely absorbed the cost, and we are still at the forefront of understanding how much they can absorb and pass on."

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Former St. Louis Fed president James Bullard notes that the ratio of household net worth to disposable income is around postwar highs. Financial conditions are already very accommodative, and more rate cuts will ease them further, which could stoke demand and push stocks to record highs.

"The economy doesn't look like it is slowing down," said Bullard, now the dean of the Mitch Daniels School of Business at Purdue University. "You are going to get a lot of investment, and you are going to get plenty of consumption. Asset prices are very high."

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Adding to the heightened uncertainties about both the near-term outlook and the longer-term potential of the economy is the fact that data availability has been limited by the ongoing government shutdown.

With downside risks to employment judged to have risen, the Federal Open Market Committee's goal now is to offset labor market weakness. Futures markets are pricing in a quarter-point cut for both the Oct. 28-29 meeting and in December, with two more in the first half of next year.

That would drive the benchmark lending rate down to 3% to 3.25%, close to neutral territory based on the Fed's longer-run projections.

Several officials argue that tariffs will result in a one-time increase in the price level, with inflation nicely settling back to 2% in coming quarters. That is what the median estimate in the Fed's September economic projection implies, with the rate of price changes about on target by 2027.

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The most appropriate message from Fed officials in December could be one of agnostic symmetry: Going forward, we could stay here, we could raise, we could cut, depending on how plausible scenarios may play out. It's a version of Fed Chair Jerome Powell's description of the policy tensions at this moment.

'[W]e have to keep our eye on inflation. At the same time, we cannot ignore and must keep our eye on maximum employment.'Fed Chair Jerome Powell

"There are no risk-free paths now. It's not incredibly obvious what to do," Powell said at his September press conference. "So we have to keep our eye on inflation. At the same time, we cannot ignore and must keep our eye on maximum employment."

Regime shifts typically have cascading effects and are often associated with nonlinearities, and the time of transition to a new equilibrium is impossible to forecast. Markets have never been good at this, often prone to bubbles as excitement builds about disruptive technologies, usually with a narrative about how "this time is different."

In a cutting cycle, investors tend to price in a fast descent toward the estimated neutral rate. With so much uncertainty around the underlying trend rate of inflation and the longer-run equilibrium rate, this seems a bad time for monetary-policy makers to endorse that slope and for investors to bet on it.

Ideally, the Federal Open Market Committee would have a consensus forecast and alternative scenarios and rate paths. One scenario: that the AI investment boom continues with even more frothy financial conditions amid scarce labor, which keeps GDP above potential output and inflation elevated. Another possibility: that further labor-market weakness and constantly changing and disorderly government economic policy.

Different scenarios would help investors assess a range of plausible economic outcomes and associated Fed responses, enhancing market efficiency and price discovery in response to new data.

Powell understands the communication problem. Now he needs the FOMC to sign on to some mechanism for a fuller expression of possible policy paths and underlying scenarios to increase transparency and accountability at a time of severe threats to Fed independence.

The goal is to find "the right pace and the right destination as we go," Powell said at his press conference around this time last year. "You don't want to tie yourself up [with] guidance."

Craig Torres is editor-in-chief at the Andersen Institute for Finance & Economics. Fabio Natalucci is the Institute's chief executive officer.

More: The government shutdown is forcing investors to trade on faith. What they need are facts.

Also read: The Fed has a big decision to make without key data. Here's what it could do.

-Craig Torres -Fabio Natalucci

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10-24-25 1228ET