The US Federal Reserve is grappling with growing uncertainty in the economy, driven by soaring consumer inflation expectations, jittery markets, and rising Treasury yields. According to data from the University of Michigan, one-year consumer inflation expectations have reached their highest level since 1981, sparking concerns about a potential price shock or downturn.
Fed policymakers are struggling to predict the outlook, with New York Fed President John Williams warning that growth could fall under 1% this year, inflation could reach as high as 4%, and the unemployment rate could rise to as much as 5%. The surge in consumer attitudes about upcoming inflation has made it increasingly difficult for the Fed to navigate.
Minneapolis Fed President Neel Kashkari emphasized that while the Fed can smooth out dislocations, it cannot dictate where long rates settle. However, he acknowledged that a clear emergency in the financial system would be needed for the central bank to intervene.
The implications for monetary policy are significant, with interest rates remaining on hold even if the economy stutters. The crossroads the Fed may be approaching highlights the need for careful consideration of potential market intervention or emergency rate cuts to restore confidence.
Investors are increasingly turning away from US assets, with US stock and Treasury prices plummeting at the same time. A pause in some planned import taxes has done little to reverse the shock, and the yield on the benchmark 10-year Treasury bond has risen significantly over the past week.
Source: https://www.reuters.com/markets/us/minn-feds-kashkari-rising-treasury-yields-could-show-investors-moving-us-2025-04-11