Karen Petrou: What Else Should Worry You
Last week, the Washington Post ran an astonishing article, easily overlooked in the personal-finance section. In it, the writer advised the many consumers she said were besieging her with fearful questions about how best to ensure their money is safe in the bank – and, if they’re still worried, where to buy a nice safe. That same day, a friend asked me if his short-term Treasury bills are safe. These are, of course, anecdotal reports, but such worries are rarely tracked as the leading indicators they are. It’s obvious in crisis after crisis that, when retail depositors and investors are frightened, we should all be very worried.
How much uncertainty does it take to create a financial or macroeconomic crisis? None of the Fed’s financial-stability reports deigns to consider consumers, nor does the Fed tell us when to worry because it fears we will if the Fed cracks its stone face. However, a brand-new Fed study provides a very useful – if frightening – analytical context in which to consider anecdotal data.
The Fed staff paper examines different types of uncertainty and their impact on economic activity and financial conditions. While it doesn’t directly extend the analysis to financial stability, the results are important given the strong correlation between economic and financial volatility and very, very bad financial-market events.
The paper assesses six key drivers of uncertainty: real economic conditions, inflation, economic policy, trade policy, geopolitical risk, and financial uncertainty as reflected in the VIX. These uncertainty drivers exploded …