Mohamed El-Erian, the president of Queens' College, and an economic advisor at Allianz and Gramercy, recently wrote that the Federal Reserve's unpredictability could undermine the theory of American exceptionalism. The full content is as follows.

Last month, when asked whether Federal Reserve officials would incorporate the plans of the incoming Trump administration into their policy considerations, Powell asserted, 'We will not speculate, we will not conjecture, and we will not assume.' Investors and economists are trying to understand whether this statement still holds true after last week's Federal Reserve policy meeting sparked unsettling market volatility.

The inherent uncertainty of this question is just a way that the Federal Reserve's highly passive policy measures magnify financial volatility. The reaction of long-term bond yields also helps explain why, when the Federal Reserve lowers interest rates again, the mortgage costs they are concerned about are rising.

At last week's policy meeting, the Federal Reserve lowered the interest rate by 25 basis points and provided a more hawkish forward guidance, pointing to a less significant rate cut in 2025 than previously expected, with long-term neutral rate expectations rising. The subsequent news conference by the Federal Reserve Chairman was the most perplexing in a series of somewhat unstable events in recent years. It was filled with contradictions.

Powell at times indicated that the recent series of 'sideways' inflation data might mean the Federal Reserve could be 'more cautious' regarding future monetary easing, while at other times he stated that the Fed's policy stance remained 'meaningfully restrictive' even after the rate cut on Wednesday.

In this context, it is not surprising that Stocks and government Bonds experienced significant intraday volatility on 'Federal Reserve Day'. The S&P 500 Index fell by 3%, while the 10-year Treasury yield jumped by more than 0.1 percentage points, marking the largest move for that yield on 'Federal Reserve Day' since the so-called 'taper tantrum' in 2013, when the Fed hinted that it might begin to taper bond purchases; the S&P 500 Index experienced its largest drop on 'Federal Reserve Day' since 2001. Meanwhile, the VIX, typically seen as Wall Street's 'fear index', soared from about 15 to an intraday high of 28.

The current narrative in the market about the Federal Reserve's 'stop-and-go' approach to rate cuts is also unstable. Some point to the 'new phase' that Powell mentioned, believing that the Federal Reserve is preparing for potential inflation effects due to the incoming Trump administration's tendency to raise tariffs, significantly cut taxes, and massively deport illegal immigrants. Others attribute the Fed's hawkish shift to inflation dynamics, which again surprises and confuses the world's most powerful central bank.

Although there is no definitive answer to this key issue, as lamented earlier, there is a more enduring force at play that is still underestimated by many. Last week's Federal Reserve policy statement is part of a larger pattern of change.

For example, in just the past five months, the Federal Reserve's actions have shifted from not cutting interest rates (at the end of July), to a significant cut of 50 basis points (in mid-September), then seemingly easily cutting by 25 basis points (in early November), and finally overturning earlier guidance and economic explanations (in mid-December).

Additionally, note the significant degree of division within the Federal Reserve. The updated "dot plot" shows a shocking range of terminal rates the Federal Reserve is expected to reach by the end of this cycle, from below 2.5% to nearly 4%.

The ongoing lack of strategic policy anchoring helps explain the current policy confusion. After committing a significant inflation error in 2021-22, the Federal Reserve became overly reliant on data, mistakenly believing that price surges were temporary. Therefore, once the latest data showed even slight changes, policy could shift in any direction, leading to drastic policy U-turns.

Market participants were right to feel uneasy about Powell's press conference last week. Besides speculating on the significance of the Federal Reserve's recent shift, they should also accept a more fundamental reality: the Federal Reserve's continued over-reliance on data increases uncertainty in the US economy.

This concern is not limited to the USA. The US economy currently serves as the locomotive for global growth, which in turn exacerbates the risks it poses to the already shaken global economy due to political turmoil and increases domestic challenges facing countries from Brazil to Japan.