Board of Governors of the Federal Reserve System

Figure 1. Selected Uncertainty Measures

Figure 1 plots the time series of real economic uncertainty (REU), inflation uncertainty (Inflation U), economic policy uncertainty (EPU), trade policy uncertainty (TPU), geopolitical risk (GPR), and the VIX. All series are calculated using U.S. data. Each series is standardized to have zero mean and unit standard deviation. The vertical lines indicate the following key events: the Gulf War, 9/11, the Global Financial Crisis (GFC), the COVID-19 pandemic, and the 2024 U.S. presidential election. Data are monthly and span the period from January 1985 to January 2025. Since 2019, selected measures of uncertainties for the United States have reached their highest levels in decades, with the latest surge coming from economic and trade policy uncertainty (EPU and TPU, respectively). For instance, geopolitical risk spiked 4.6 standard deviations above its historic mean in March 2022 following the Russian invasion of Ukraine. Economic policy uncertainty and inflation uncertainty jumped to 7.7 standard deviations in May 2020 and the VIX jumped to 4.8, while inflation uncertainty reached just over 5 standard deviations in the aftermath of the pandemic. Recently, trade policy uncertainty has soared 8 standard deviations above its historical mean. In figure 3, we plot the responses of investment following a shock in each type of uncertainty corresponding to their maximum spike since late 2019.

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Figure 2. Investment Responses to Uncertainty Shocks

Figure 2 plots the impulse response of investment to a one standard deviation shock to the following uncertainty measures: EPU (the line with circles), the VIX (the dotted line), REU (the dashed line), inflation uncertainty (the crossed line), TPU (the dotted dashed line), and GPR (the line with triangles). The responses are estimated from a VAR model that includes, in order, the National Financial Conditions Index (NFCI), the specified uncertainty measure, the FED funds rate, investment, and consumption. The data are monthly and span the period from January 1985 to January 2025. In all cases, investment posts statistically significant declines. The size, timing, and persistence of the decline varies across measures. For trade policy uncertainty (TPU) and geopolitical risk (GPR), the drop is sharp but short and smaller, which may reflect the fact that these shocks hit smaller segments of the economy and, in the past, may have been resolved more quickly. For economic policy uncertainty (EPU) and financial uncertainty (VIX), the drag on investment is more sizable and longer lasting, possibly reflecting the broader nature of the uncertainty and more sustained caution given shocks to financial markets. The largest and most prolonged effects on investment come from shocks to the predictability of the economy (REU), particularly inflation (IU). These shocks may hit broader portions of the economy, and it may take more time for confidence in the predictability of the economy to return for all economic agents.

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Figure 3. Investment Responses to Maximum Uncertainty Shocks Over the Last 5 Years

Figure 3 plots the impulse response of investment to a standard deviation shock in each type of uncertainty corresponding to their maximum since December 2019 for the following uncertainty measures: EPU (line with circles), the VIX (the dotted line), REU (the dashed line), inflation uncertainty (the crossed line), TPU (the dotted dashed line), and GPR (the line with triangles). The results are the same as those in Figure 2 scaled to a shock of a different magnitude.

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