Measuring uncertainty

How certain are you of what's going to happen over the next few months? People's confidence in anticipating the future dwindles during periods of major economic change. Economists and analysts try to gauge the level of uncertainty about economic conditions because it can affect economic decisions (saving, spending, investing, switching jobs…), which can affect aggregate economic outcomes.

Our first FRED graph above plots one widely used measure of uncertainty: the CBOE Volatility Index, better known as VIX. A post from February explains the VIX in detail. Basically, it uses stock price options to measure how much volatility financial markets expect in the near future, with volatility serving as a proxy for economic uncertainty. This volatility index rose sharply between March and April 2025 and is nearing levels last seen during the COVID-19 pandemic.

Many factors can cause uncertainty, such as structural economic shocks, global events, and financial crises. Policy actions can also drive economic uncertainty. In our second FRED graph above, we use the overall economic policy uncertainty index (EPU) to understand how important policy uncertainty is for the recent increase in overall uncertainty.

The EPU focuses on the economic effects of government policies, rather than financial and economic conditions. It measures this uncertainty from news coverage from a large set of US newspapers. For example, an uncertainty value of 120 would mean that there's 20% more uncertainty about economic policy than is typical during the base period.

Economic policy uncertainty rises during periods of economic turmoil: It spiked in 1998 during the Asian financial crisis, in 2008 at the onset of the Great Recession, and in 2020 as COVID pandemic lockdowns began. The EPU index began rising persistently in late 2024.

The EPU also has values for subcategories such as taxes, regulation, and trade. By looking at these subcategories, we can identify the specific types of economic policy that are most associated with uncertainty.

Our last FRED graph above plots values for several subcategories as well as overall EPU. Until summer 2024, most types of economic policy uncertainty were at or below 100, meaning they were at normal or low levels. Recent uncertainty, which began rising in 2024, has been especially pronounced for trade policy (pink dashed line). By February 2025, it had jumped to almost 2500, which implies close to 25 times more uncertainty than the norm.

Trade policy uncertainty has spiked before: prior to the signing of NAFTA in late 1993, peaking at just over 1000 before returning to baseline values, and in 2018-19 as China and the US imposed additional tariffs on each other. The most recent increase in trade policy uncertainty corresponds to the announcements of new tariff policies by the Trump administration throughout early 2025. In general, trade policy uncertainty rises during periods of major change in trade policies but returns to lower levels once those policies are established.

How this graph was created: Search FRED for and select the VIXCLS (CBOE Volatility Index) series. For the second graph, search for and select the EPU (economic policy uncertainty) series. For the third graph, search for and select the EPU categorical index, overall series. Then scroll down and click on the release table, below the graph, where you can choose the categories you want to display. Note that this post will continue to be updated with more recent data after its publication.

Suggested by Miguel Faria-e-Castro and Marie Hogan.