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United States: Moody’s Analytics Policy Uncertainty Index

Tadhg Gaelach

Premium Account
Jan 14, 2016
United States: Moody’s Analytics Policy Uncertainty Index

Actual, previous and consensus values with detailed economic analysis for United States Moody’s Analytics Policy Uncertainty Index .

Analysis by Ryan Sweet

Previous mce-anchor (Before any revisions)
November 17​
Next Release
Nov 28, 2017​
Nov 21, 2017 10:30 AM​
First Take

The four-week moving average in our U.S. policy uncertainty index has resumed rising. The four-week moving average increased from 77.9 to 82.2 in the week ended November 17. This is the second consecutive increase, putting the four-week moving average at its highest since late September. Uncertainty will likely remain elevated considering the dynamics in Washington DC, and uncertainty about monetary policy remains because of turnover on the Federal Open Market Committee. The economic costs of elevated policy uncertainty this year are small, for now.

The Numbers

  • The four-week moving average in our policy uncertainty index increased from 77.9 to 82.2 in the week ended November 17. This is the second consecutive weekly gain. Uncertainty remains higher than normal, which has been a feature of this expansion.
  • The good news is that the economic implications of elevated uncertainty aren’t overly meaningful, though uncertainty may be affecting demand for commercial and industrial loans. Businesses appear to have adjusted to persistently high uncertainty over the past several years. Still, there is the risk of a sudden and significant surge in policy uncertainty, which would undermine hiring and investment.
  • The policy uncertainty index incorporates the latest Philadelphia Fed Survey of Professional Forecasters. The survey showed that uncertainty surrounding the forecast for inflation over the next four quarters has increased, which boosted our estimate of monetary policy uncertainty. Uncertainty surrounding unemployment was little changed.
  • The contribution to our uncertainty index from expiring tax provisions is among the lowest since the inception of the series. This is because the Protecting Americans From Tax Hikes Act of 2015 made permanent more than 20 tax provisions and extended several others for two to five years. This stripped away the need for Congress to pass its usual list of tax extenders in 2016 and 2017, which in turn meant less policy uncertainty from this component of the index.
  • Other measures of economic policy uncertainty are mixed. The measure created by economists at Stanford and the University of Chicago has resumed rising. The Philadelphia Fed’s partisan conflict index increased in September and remains high. The NFIB uncertainty index fell from September to October. The VIX has remained surprisingly low since the election.

Behind the Numbers

Policy uncertainty has edged higher over the past couple of weeks, not surprising considering the dynamics in Washington DC. Fiscal policy uncertainty may climb further as the debate surrounding tax cuts intensifies. However, monetary policy uncertainty could also rise.

The Federal Open Market Committee is going to become even more shorthanded, as current Fed Chair Janet Yellen announced she will resign once Jerome Powell, her presumptive successor, is sworn in as the next chair of the Federal Reserve. Yellen’s resignation doesn’t alter our forecast for monetary policy in 2018. The FOMC will lean more hawkish, and the power will shift toward the regional Fed presidents until the open seats on the FOMC are filled. The governors normally vote with the chair, but Powell will likely have only a pair of votes in his pocket heading into his first meeting.

Also, there are some operational issues with only three board governors. Under this scenario, the central bank's ability to take emergency action will be impaired; under the Federal Reserve Act, certain decisions require supermajority approval. Odds that the Fed would need to take emergency action soon are extremely low, and the board has been shorthanded before. But having this many open seats is far from ideal.

Yellen could have stayed on as a governor until her 14-year term expires in 2024, but this would have been a break from tradition. Yellen’s departure will leave four open seats on the seven-member FOMC. Churn among the Federal Reserve Board of Governors has been high over the past several years, and it could eventually catch lawmakers' attention. A governor's full term is 14 years; appointments are staggered so that one term expires on January 31 of each even-numbered year. A governor who has served a full term may not be reappointed, but a governor who was appointed to complete an unexpired term may be reappointed to a full 14-year term.

Recent presidents have made numerous appointments to the board, and lawmakers may eventually revisit this. Also recently, presidents have kept seats open on the Board of Governors. Under Barack Obama, the board had a vacancy 80% of the time, compared with about 60% under George W. Bush and Bill Clinton. The vacancy rate was below 40% from the Kennedy to the Reagan administrations.

The high vacancy rate under Obama wasn't entirely his fault—a number of his nominees were never confirmed. Since Jimmy Carter, presidents have, on average, made about seven appointments to the Federal Reserve Board.