Federal Reserve Bank of San Francisco President Mary Daly stated that offering policy guidance is inadvisable due to elevated uncertainty. Despite the uncertainty, businesses are cautious but not stagnating.

The high level of market uncertainty prompts central banks to reassess their strategies. This uncertainty surpasses typical levels, though developments like eased US-China tariffs may reduce some anxiety.

Impact Of Uncertainty On Central Banks

Uncertainty impacts central banks, businesses, and households extensively. When uncertainty is too high to provide forward guidance, potential responses include considering a rate cut or engaging in dovish discussions to ease conditions for businesses and consumers.

Daly’s remarks suggest that forecasting central bank policy beyond the very near term may be unstable right now, largely because the usual indicators that inform those decisions are not pointing in a consistent direction. Businesses, while not retreating altogether, are clearly holding back on bold moves. They’re not frozen, but they’re decidedly hesitant—waiting to see how matters unfold.

The kind of uncertainty we are dealing with goes beyond simple economic cycles or the usual sets of data fluctuation. It stretches across sectors and decision-making bodies. There is pressure here, not necessarily from a singular event, but from an accumulation of variables that resist resolution. For example, any easing in the trade tariffs between major economic powers is welcome, but it arrives as a single ray in wider clouded skies.

From our perspective, we interpret this pullback in forward guidance as a warning. It doesn’t speak to chaos, but it does imply fragility. When communication becomes more restrained, it usually correlates with a desire to avoid firm commitments. That alone hints towards the directional uncertainty of upcoming moves.

In bond and rate markets, that hesitancy translates to inconsistent pricing. Yield curves, normally orderly, begin showing divergence that doesn’t resolve across maturities. When we see central banks opting against offering concrete projections, it’s often due to a perceived imbalance between the cost of being wrong and the benefit of appearing steady. Hence, we watch how decision-makers shift – not in grand statements, but through smaller signs like emphasis on “data dependence” or sudden concern over real-time indicators.

Market Reactions And Implications

Powell, likely to be more cautious himself following Daly’s tone, has fewer reasons to accelerate tightening, unless inflation metrics flare again. Labour market data needs to be watched not just for monthly totals, but also for details—revisions, participation, and wage conditions. Misses or overreactions by the Fed, in either direction, carry weight.

On our desks, that implies careful calibration. Implied volatility won’t be low – not in this climate. Skew has returned to short-dated structures. We’re pricing more localised reactions instead of larger trend trades. That is appropriate. Where guidance falls quiet, risk must be priced actively.

We find that when Fed uncertainty rises, correlation between macro products tends to weaken. That isn’t permanent, but in moments such as this—a potential inflection—it forces positioning to become more surgical. There’s less room for blanket exposure across related markets, and more need to define the specific event path you’re trading.

For now, narrative risk is high again. Not every scheduled speech will hold weight, but the potential for tone shifts remains elevated. We’ve seen this before. The lack of forward direction doesn’t mean no direction; it means market participants must interpret intent from subtler moves. That requires more attention to liquidity, to interbank pricing, to auction results. Minor things that used to seem routine may now tell you more than the headline numbers.

Be wary of assuming a pause equals a peak. The absence of guidance may lead some to interpret that the terminal rate has already arrived. But with wider economic readings bouncing inconsistently, that is not an argument we’re prepared to back broadly. Instead, we lean on shorter maturities and dynamic delta management, and we avoid assuming mean reversion where the inputs are still unresolved.

As rate path clarity continues drifting, the premium on optionality—and on timing itself—will not reduce soon. The toolkit must shift accordingly.

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