The market is in increasing doubt over what the Fed will do and by how much.Kansas City Fed Policy Rate UncertaintyPlease consider the Kansas City Fed Policy Rate Uncertainty measure.The Kansas City Fed’s Measure of Policy Rate Uncertainty (KC PRU) is a daily measure of market-based uncertainty regarding where short-term U.S. interest rates will be one year in the future.The KC PRU is constructed using the same methodology as the Chicago Board Options Exchange Volatility Index (CBOE VIX) on Chicago Mercantile Exchange’s (CME) options data. We use Eurodollar contracts prior to 2023 and contracts on the Secured Overnight Financing Rate (SOFR) from 2023 onward. The Economic Review article “Introducing the Kansas City Fed’s Measure of Policy Rate Uncertainty” provides further details on the index, including a technical appendix describing the measure’s construction. Data are updated on a daily basis.The KC PRU is calculated through an automated procedure using publicly traded options contracts. The measure does not reflect the views of the Federal Reserve Bank of Kansas City, its staff, or the Federal Reserve System.One percentage point roughly means the market expects the one-year-ahead rate to be within about ±1 percentage point with 68% confidence, similar to how VIX works for stocks.Long-Term Measure of Policy Rate Uncertainty (KC PRU)Key Takeaways (1989–2025)PeriodPeak / BehaviorWhat was happening1989–1990Very high (~1.88)Early data; post-1987 crash + savings & loan crisis + rate volatility1990s–early 2000sFrequent spikes (1.5–1.8)Recessions (1990, 2001), Asian financial crisis, dot-com bubble2008–2009Sharp spike to 1.94Global Financial Crisis — massive uncertainty about Fed response2010–2019Generally lower, with dips to ~0.35A stable low-rate environment, clear Fed policy guidance2020Brief spike then dropCOVID shock — Fed cut rates to zero quickly, uncertainty resolved fast2022–early 2023Highest on record (~2.18)Inflation surge → aggressive Fed hiking cycle + banking stresses (SVB)2023–2025Sharp decline to ~1.12Fed paused hikes, then started cutting in 2024; markets gained clarityDetail InterpretationPolicy rate uncertainty is mean-reverting but has clear regime shifts. It rises sharply during economic stress, major Fed pivots, or when inflation is unpredictable.The 2022 peak stands out as the highest in 35+ years — reflecting the unusual combination of post-pandemic inflation shock + fastest hiking cycle in decades.Practical ApplicationHigh uncertainty periods often coincide with volatile bond markets, wider credit spreads, and cautious investor behavior.Traders and economists watch this as a complement to the VIX — it specifically captures monetary policy confusion.Era of Forward Guidance Is endingThe era of ridiculous forward guidance repeated month-after-month (even during some of the recent spikes), is coming to an end.Kevin Warsh cannot control interest rate policy by himself, but he is likely to stop month-to-month forward guidance.Warsh in Hot SeatEnding forward guidance, if it happens, will be a bit of self preservation.Warsh wants lower rates to appease Trump, but the market now thinks the next move is a hike (my opinion for many months).Bond yields are breaking out. Warsh will not only be fighting the rest of the FOMC committee. He will be fighting the bond market itself.Good luck with that.Bond Market on Verge of Crash, Long Bond Yield Near 19-Year HighEarly this morning I noted Bond Market on Verge of Crash, Long Bond Yield Near 19-Year HighThe bond market thinks as much of Trump’s China visit as I do.As I type, the 30-year long bond yield is right at the 30-year high, up 11 basis points to 5.125 percent.Bond Yield DirectionYields are heading up, as they should, given Trump’s disastrous tariff policy and Mideast policy, both contributing to inflation.Trump needs a recession to cool demand, as long as it’s not a staflationary recession that kills the jobs market as well.Unfortunately, a stagflationary outcome looks increasingly likely.Warsh will not deliver a rate cut in June. And Trump will immediately howl. That much is clear.Warsh’s baptism of fire is coming right up. Expect Trumpian fireworks on June 17, the next FOMC meeting. The world will be tuned in.Original Post