The uncertainty of monetary policy - from internal to external

 

There is considerable discussion about the uncertainty surrounding Fed monetary policy; however, it is essential to break down that uncertainty into two key components: internal and external. Internal uncertainty is associated with policymakers not having a consensus on the direction of policy. External uncertainty is related to the lack of agreement among market participants or how investors perceive the direction of monetary policy. 

Generally, the market focuses on external uncertainty. Internal uncertainty is minimized by the Fed, usually voting in agreement at the Fed meeting. We may learn about disagreement with a long lag. However, we can use the SEP forecasts as a proxy for internal conflict. If the path of the SEP forecasts shows little dispute, then there is little uncertainty. If the SEP forecasts are diverse, then there is little agreement on inflation or growth. You cannot have agreement on policy action if the forecasts for interest rate directions are all over the dot plot. 

Currently, we are seeing significant divergences between these forecasts. You cannot have an agreement with the policy if you have some Fed SEP showing wide differences. This is clearly the case for 2025 and the following years. Investors cannot be expected to make firm investment plans if they cannot see agreement among the central bankers.