Board of Governors of the Federal Reserve System

Figure 1. Uncertainty About U.S. Core PCE Inflation

Figure 1 is a bar chart titled Uncertainty about U.S. core PCE inflation. It shows the number of FOMC participants that consider uncertainty about U.S. core PCE inflation as lower (first bar to the left, showing 1 participant in June, 0 in March), broadly similar (second or middle bar, showing 1 participant in June and in March), or higher (third bar to the right, showing 16 participants in June, 17 in March). These considerations are compared to the average over the past 20 years.

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Figure 2. U.S. Uncertainty Measures

Figure 2 is a line chart titled U.S. uncertainty measures. It shows the time series for three U.S. uncertainty measures: the VIX, in the dark yellow dotted line, the Economic policy uncertainty index (EPU), in the blue dashed line, and the real economic uncertainty measure (REU), in the solid black. The time series run from January 2018 to March 2023 and are shown in standard deviations from the mean. The figure includes two vertical lines marking the following important episodes: March 2020 (COVID-19) and March 2022 (Russian invasion of Ukraine). All uncertainty measures increased to about 5 standard deviations around the outbreak of COVID-19. While VIX and EPU quickly retrace, REU has held at historically elevated levels above 2 standard deviations until the end of the sample.

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Figure 3. U.S. Economic Uncertainty

Figure 3 is a line chart titled U.S. economic uncertainty. It shows a longer time series for the real economic uncertainty (REU) than figure 2, running from January 1960 to March 2023. The time series are shown in standard deviations from the mean. The figure includes three vertical lines marking the following important episodes: the global financial crisis (GFC) in 2018, March 2020 (COVID-19), and March 2022 (Russian invasion of Ukraine). REU spikes around recessions, including the 73-75 recession, the early 80s recession, the global financial crisis of 2008, where it reaches a value of around 2 standard deviations, and COVID, where it reaches its peak, at about 7 standard deviations.

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Figure 4. U.S. Economic Uncertainty: Components

Figure 4 is a line chart titled U.S. economic uncertainty: Components. It shows time series for the components of real economic uncertainty (REU) from January 1960 to March 2023. Inflation uncertainty is shown in the red solid line, labor uncertainty in the dark yellow dashed line, output uncertainty in the blue dash dotted line, and other components in the dark gray dotted line. The time series are shown in standard deviations from the mean. The figure includes three vertical lines marking the following important episodes: the Global financial crisis in 2018, March 2020 (COVID-19), and March 2022 (Russian invasion of Ukraine). All components are somewhat correlated, spike around crises, and peak during the outbreak of COVID-19, as shown in Figure 3. However, while the inflation component remains elevated at over 3 standard deviations, all other components return to more moderate levels after the second quarter of 2023.

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Figure 5. U.S. Inflation Uncertainty Measures

Figure 5 is a line chart titled U.S. inflation uncertainty measures. It shows time series for the U.S. inflation component of REU, in the red solid line, the survey of professional forecasters (SPF) CPI Inflation Forecast Dispersion, in the black dashed line, and the Survey of economic professionals (SEP) Core PCE Inflation Diffusion Index, in the blue dotted line, from January of 2008 to March 2023. The time series are shown in standard deviations from the mean. The three time series are somewhat correlated. They increase after the outbreak of COVID-19 and, by the end of the sample, all of them reach levels above 2 standard deviations from their historical means.

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Figure 6. Non-US (foreign) economic uncertainty

Figure 6 includes two panels, both line charts. Panel A is titled foreign economic uncertainty: Aggregate, and it shows the time series for foreign the real economic uncertainty (REU) index from January 1960 to March 2023. The time series are shown in standard deviations from the mean. The figure includes three vertical lines marking the following important episodes: the global financial crisis (GFC) in 2018, March 2020 (COVID-19), and March 2022 (Russian invasion of Ukraine). The dynamics of foreign economic uncertainty are very similar to those of the U.S. economic uncertainty in Figure 3.

Panel B is titled foreign economic uncertainty: components, and it shows time series for the components of foreign real economic uncertainty (REU) from January 1960 to March 2023. Inflation is shown in the red solid line, Labor in the dark yellow dashed line, Output in the blue dashed dotted line, and Other in the gray dotted line. The time series are shown in standard deviations from the mean. The figure includes three vertical lines marking the following important episodes: the global financial crisis (GFC) in 2018, March 2020 (COVID-19), and March 2022 (Russian invasion of Ukraine). The dynamics of the components of foreign economic uncertainty are also very similar to those of the U.S. economic uncertainty in Figure 3; in particular, inflation uncertainty becomes the dominant source of aggregate uncertainty after the outbreak of COVID-19.

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Figure 7. U.S. Inflation and Monetary Policy Uncertainty Measures

Figure 7 is a line chart titled U.S. inflation and monetary policy uncertainty measures. It shows time series for the U.S. Inflation component of REU, in the red solid line, the ICE BofA MOVE Index, in the dark yellow dashed line, and the monetary policy uncertainty (MPU) index, in the blue dotted line, from January 2019 to March 2023. The time series are shown in standard deviations from the mean. We include a vertical line marking the lift off of the U.S. monetary policy rate from its effective lower bound in 2022. The figure shows that both financial and text-based measures of monetary policy uncertainty increased as rates lifted off the effective lower bound in 2022, and the current level of monetary policy uncertainty and inflation REU are well above their historical averages.

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Figure 8. Effects of Inflation Uncertainty Shocks

Figure 8 is a bar chart titled effects of inflation uncertainty shocks. It shows the economic effects of a three-standard-deviation shock in U.S. Inflation REU (the dark blue bars) and Foreign Inflation REU (the light blue bars) inflation uncertainty on industrial production (the bars to the left), consumption (the bars in the middle) and investment (the bars to the right). The effects are expressed as 12-month percent changes. The bars show that a large shock in U.S. inflation uncertainty is followed by sizable declines in industrial production (lower than minus 0.60 percent), consumption (around minus 0.5 percent), and investment (around minus 0.6) after 12 months. Higher foreign inflation uncertainty also has significant domestic effects, as seen by the light blue bars. This effect is statistically significant and around half that of domestic inflation uncertainty.

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