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It is a rare occasion in history that central banks have had such a difficult time in setting policy. Ask any banker where monetary policy is going over the next few years, and the answer is always “we don’t know” because so much is unknown at this point in the business cycle.

 Fed Chairman Powell is simply waiting out the Trump trade war for the moment because he really has no alternative.Trying to fathom when international trade will settle down from the ‘Liberation Day’ of universal tariffs is anyone’s guess. While the majority of economists anticipate that these tariffs will be removed, in large measure, by the time the current pause expires, no one really feels confident that we can escape further turmoil from the chaotic policy environment engulfing the US administration. Specifically, the effects of the tariffs already in place, especially on Chinese goods, have yet to fully show up in the inflation data. Until that occurs, no wonder Chairman Powell mused out loud that:

“We haven’t been through a situation like this, and I think we have to be humble about our ability to forecast it....   The timing for rate cuts “could come quickly. It could not come quick... “We feel like we’re going to learn a great deal more over the summer on tariffs.”

The dilemma facing central bankers is quite simple. Do tariffs re-ignite inflation and force the Fed to tighten policy? Or, do tariffs dampen consumption sufficiently to result in economic slowdown, if not out right recession? The jury is out on both accounts, despite the majority of members of the Fed rate-setting committee forecasting an additional two rate cuts before year end. If ever there were a mug’s game, forecasting rate cuts is one. Powell  downplayed the committee’s ability to forecast, by arguing that “you can make a case for any of the rate paths that you see” in the latest projections.

The Bank of Canada expressed no less a high degree of uncertainty in its most recent rate decision, stating that:

“With uncertainty about US tariffs still... we will continue to assess the timing and strength of the both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs.”This is the same dilemma facing the Fed.

Lastly,in its most recent decision,the ECB stressedthe difficulty in forecasting theoutcomes from the US tariff policies on growth and inflation, stating that :

 “a further escalation of trade tensions over the coming months would result in growth and inflation being below the baseline projections. By contrast, if trade tensions were resolved with a benign outcome, growth and, to a lesser extent, inflation would be higher than in the baseline projections”. Put simply, the ECB is struggling with alternative outcomes from the trade war, not sure which scenario will prevail.

Central bank policy directions everywhere are as clear as mud.

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