The economy today is undergoing multiple regime shifts all at once, and investors need to be wary of being overly dependent on the Federal Reserve’s guidance on the future path of interest rates given the rapidly changing economic and financial landscape.

Cross-cutting forces have been unleashed. The upending of the international order of trade and finance, the wrenching down of immigration flows, mercantilist policies, and the U.S. government’s interest in the economic affairs of leading companies could serve as impediments to growth while keeping inflation above the Fed’s 2 percent target.

At the same time, financial deregulation, the diffusion of artificial intelligence into business processes, and innovations in payments and digital finance could all boost profits and productivity, albeit at a speed that remains unclear. 

Adding to the heightened uncertainties about both the near-term outlook and the longer-term potential of the economy is the fact that data availability has been limited by the ongoing government shutdown.

Significant Risks

With downside risks to employment judged to have risen, the Federal Open Market Committee’s goal now is to offset labor market weakness. Futures markets are pricing in a quarter-point cut for the Oct. 28-29 meeting and in December, and two more in the first half of next year. 

That would drive the benchmark lending rate down to 3 percent to 3.25 percent, close to neutral territory based on the Fed’s longer-run projections.

Several officials argue that tariffs will result in a one-time increase in the price level, with inflation nicely settling back to 2 percent in coming quarters. That is what the median estimate in the Fed’s September economic projection implies, with the rate of price changes about on target by 2027. 

Inflation has been above the Fed’s target for more than four years. Signaling a steady rate-cutting path when the economy is still adjusting to trade and immigration policy changes comes with significant risks for investors. The forward rate curve could abruptly flatten if inflation turns out to be stubbornly high, with implications for risk asset prices given already elevated valuations.

“The economy hasn’t fully absorbed the cost of trade and immigration policy,’’ said Michael Gapen, chief U.S. economist at Morgan Stanley & Co. “Corporates have largely absorbed the cost and we are still at the forefront of understanding how much they can absorb and pass on.’’

Former St. Louis Fed President James Bullard notes that the household net worth to disposable income ratio is around post-war highs. Financial conditions are already very accommodative, and more rate cuts will ease them further, which could stoke demand and push stocks to new record highs.

“The economy doesn’t look like it is slowing down,’’ said Bullard, now the dean of the Mitch Daniels School of Business at Purdue University. “You are going to get a lot of investment, and you are going to get plenty of consumption. Asset prices are very high.’’

Agnostic Symmetry

The most appropriate message from Fed officials in December could be one of agnostic symmetry: Going forward, we could stay here, we could raise, we could cut, depending on how plausible scenarios may play out. It’s a version of Chair Jerome Powell’s description of the policy tensions at this moment.

“There are no risk-free paths now. It’s not incredibly obvious what to do,’’ he said at his September press conference. “So we have to keep our eye on inflation. At the same time, we cannot ignore and must keep our eye on maximum employment.’’

Regime shifts typically have cascading effects, are often associated with nonlinearities, and the time of transition to a new equilibrium is impossible to forecast. Markets have never been good at this, often prone to bubbles as excitement builds around disruptive technologies, usually with a narrative about how “this time is different.’’

In a cutting cycle, investors tend to price in a fast descent toward the estimated neutral rate. With so much uncertainty around the underlying trend rate of inflation and the longer-run equilibrium rate, now seems like a bad time for policy makers to endorse that slope and for investors to bet on it.

Plausible Scenarios

Ideally, the FOMC would have a consensus forecast and alternative scenarios and rate paths. A sensible scenario would be the continuing AI investment boom with even more frothy financial conditions amid scarce labor that keeps GDP running above potential output and inflation elevated. Another might be more labor market weakness amid disorderly government economic policy. Different scenarios would help investors assess a range of plausible economic outcomes and the associated Fed responses, enhancing market efficiency and price discovery in response to new data.

Chair Powell understands the communication problem. Now, he needs the FOMC to sign on to some mechanism for a fuller expression of possible policy paths and underlying scenarios to increase transparency and accountability at a time of severe threats to Fed independence.

The goal is to find “the right pace and the right destination as we go,’’ he said at his press conference around this time last year. ”You don’t want to tie yourself up’’ with “guidance.’’

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A version of this blog first appeared on MarketWatch