With mixed signs on the US economy — the July jobs report was much weaker than economists had forecast, yet retail sales for the month outperformed — the judgment call on when to ease and by how much becomes all the more challenging. And that’s reflected in futures markets in the run-up to Jackson Hole.

Federal funds futures for a year forward are swinging around by the most this year. The 30-day realised volatility for the contracts jumped to 1.86 last week, the highest since June 2023, when it was elevated in the wake of the regional US banking crisis. The current reading is almost triple the average in data going back to 1991.

In the wake of the July jobs report, which showed an unexpected jump in the unemployment rate, and a slide in equities, traders began betting on a 50 basis-point cut at the Fed’s September meeting, if not before. Futures now suggest a smaller, 25 basis-point move is more likely.

An extreme example of the uncertainties facing central bankers at this stage of the economic cycle emerged from New Zealand last week. The Reserve Bank shocked observers by cutting rates, after having signalled three months before that such a step wouldn’t happen until well into next year.

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The abrupt shift by the RBNZ “raises massive questions about the bank’s reading of the economy and its forecasts — and frankly makes it hard to trust its judgment,” said Brad Olsen, a Wellington, New Zealand-based economist at policy think tank Infometrics. “The yo-yoing in views also means that no one can be quite sure of what’s next.”

RBNZ officials defended their actions, saying they were responding to the information available at the time. Governor Adrian Orr later said moves from here on are likely to be “careful” and “measured.”

Surprise moves

The RBNZ episode came a week after Japanese central bankers had to swiftly recalibrate their message.

The Bank of Japan on July 31 surprised some observers by both raising its key rate by 15 basis points and including forward guidance in its policy statement telegraphing further hikes to come. By August 7, after equities had tumbled and the yen surged, the BOJ sent a strong dovish signal by pledging to refrain from hiking when the markets were unstable.

In Europe, central bankers are facing a dilemma, with recent price data showing a surprise uptick in euro-area inflation to 2.6 per cent alongside indications that the economy is doing worse than expected. Officials anticipate inflation to reach the 2 per cent target at the end of 2025, but they always stress a high level of uncertainty.

Some policymakers, such as Greece’s Yannis Stournaras, see weaker growth as further justification for more easing, while others stress that inflation is still sticky. “We need to remain vigilant,” said Executive Board member Isabel Schnabel at the end of July.

Markets are fully pricing two more rate reductions this year, and a more than 50-50 chance of a third.

Uncertainty universal

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This month’s split vote on the BOE’s Monetary Policy Committee saw Bailey at odds with his own chief economist, Huw Pill, who voted against the rate reduction. Bailey said after the August meeting that rate-setters are uncertain on which among multiple possible scenarios the economy could take, and have different views on their likelihood.

They range from a scenario where the unwinding of price pressures is “baked in” to a less-benign outcome where permanent changes in price and wage setting require tight policy for longer. It produced alternative scenarios due to the “high uncertainty,” Bailey said.

Uncertainty may be the one thing all the central bankers can agree on.