How does economic uncertainty affect the economy?

Uncertainty about economic policy can shape the decisions of households and firms. When the policy environment becomes less predictable, for example, households and firms may adjust their spending and investment behavior. This post looks at how uncertainty co-moves with consumption, investment, and output in India.

Our first FRED graph, above, does show a negative relationship between economic policy uncertainty and the growth rate of consumption in India. That is, periods of higher uncertainty tend to coincide with weaker consumption growth. One plausible mechanism may be that higher uncertainty encourages households to postpone discretionary spending, increase precautionary savings, and delay major purchases.

How do we measure uncertainty?

The Economic Policy Uncertainty (EPU) Index for India, shown in the graph by the solid blue line, is constructed by tracking the frequency of newspaper articles that discuss policy-related economic uncertainty. Specifically, the index draws on major publications in India and counts articles that jointly reference terms related to uncertainty, the economy, and policy (such as regulation, fiscal policy, and central banking). These counts are scaled by the total number of economic policy uncertainty articles in each newspaper and then normalized to ensure comparability across sources and over time. The index is set to have an average value of 100 in the pre-2011 period. Higher values of the index indicate greater policy-related economic uncertainty, while lower values indicate relatively more stable and predictable policy conditions.

The EPU Index is available at a monthly frequency. Since the growth rates of consumption, investment, and output are reported quarterly, the EPU index is aggregated to the quarterly frequency to ensure consistency.

Our second FRED graph, above, shows another negative relationship—this time, between the EPU Index and investment growth in India. That is, higher policy uncertainty is associated with slower investment growth. It may be the case that higher uncertainty induces firms to delay irreversible investment decisions and wait for clearer policy signals.

A similar negative relationship holds between EPU and real GDP growth. This pattern is consistent with the mechanisms described above: When households defer consumption and firms postpone investment, aggregate economic activity slows down.

Overall, higher EPU is consistently associated with weaker consumption, investment, and GDP growth. While these are simple correlations, they suggest that policy uncertainty dampens economic activity.

How these graphs were created: For the first graph, search FRED for and select the series “Economic Policy Uncertainty Index for India” and click “Edit Graph.” Modify the frequency to “Quarterly” and the aggregation method to “Average.” Then open the “Add Line” tab and select the series “National Accounts: GDP by Expenditure: Constant Prices: Private Final Consumption Expenditure for India” (series ID: NAEXKP02INQ189S). Set units to “Percent Change from Year Ago” at a “Quarterly” frequency. Then click on “Format,” choose line 2, and use dotted / red for line style. Set Y-axis position to “Right” and close the panel. Set the date range to 2003-01-01 to 2023-07-01. For the second graph, repeat the same exercise substituting the consumption series for gross fixed capital formation.

Suggested by Bishmay Barik and B. Ravikumar.

This blog post uses FRED to analyze market responses during the 2026 U.S.-Israeli military action against Iran.

Timeline

In 2025, the International Atomic Energy Agency (IAEA) raised international concerns about Iran’s nuclear program. The US and Israel struck Iranian nuclear sites in June 2025, and tensions rose again in January and February 2026. On February 27, 2026, the Associated Press reported that the IAEA could not verify that Iran had suspended “all enrichment-related activities.” Three subsequent events substantially moved oil and equity prices.

• February 28, 2026: The US and Israel initiated military action against Iranian military, government, and nuclear sites.
• March 1, 2026: Media outlets reported shipping disruptions—specifically, damage to and obstruction of oil tankers in the Strait of Hormuz.
• April 13, 2026: The US implemented a naval blockade of Iran’s ports.

Market responses

We track how three asset prices have behaved around these three recent events, which are shown in the graph as dashed vertical lines:

• Brent Crude Oil Prices.
• West Texas Intermediate (WTI) Crude Oil Prices.
• The CBOE Volatility Index.

Brent prices reflect conditions in European oil markets, which are largely dependent on supplies from the North Sea and Persian Gulf. West Texas Intermediate (WTI) prices reflect domestic supply and demand in US oil markets. Brent prices exceeded WTI prices by as much as $20 or $30 a barrel prior to 2015, the year the US lifted the ban on exporting its own crude oil to other countries.

Since 2015, arbitrage has prevented all but modest deviations in Brent and WTI prices over the long-term, but transportation costs, existing contracts, and delivery delays have allowed significant divergence over weeks and months.

The CBOE Volatility Index (VIX) measures 30-day-ahead S&P 500 (stock market) volatility and is often considered a measure of fear in financial markets.

The recent data can be interpreted as follows:

• Minimal oil price movement before February 28, 2026, suggests the military strikes caught markets off guard.
• The joint movement of oil prices and VIX in the first week of March is consistent with broad market pressures.
• Initial oil price movements in the first week were basically appropriate for the price of US crude (WTI) but understated the eventual $50 rise in Brent in European markets, which depend on oil from the Persian Gulf region.
• After March 15, a gap widened between WTI and Brent prices—which normally track closely—demonstrating that disruptions to Persian Gulf tanker traffic affected European markets more than US markets.
• The persistence of the gap between WTI and Brent prices will reflect how long it takes for markets to return to their equilibrium as futures contracts are delivered and oil is rerouted.

How this graph was created: Search FRED for “Brent Oil Prices.” To add a new line, click on “Edit Graph,” open the “Add Line” tab, search for “WTI Oil Prices,” and click “Add to graph.” Repeat for “CBOE Volatility Index.” To add vertical lines for each historical date, still in the “Add Line,” click on “Create user-defined line.” For each of the 3 dates—2/28/2026, 3/1/2026, and 4/13/2026, enter the date as the starting and ending date, then set the values for the line to start at 60 and go to 130. Finally, select the date range for the graph as a whole: 2/21/2026 to 4/17/2026.

Suggested by Christopher Neely.

Our FRED graph above displays the average annual interest rates (also called yields) for three common types of retail bank and credit union deposits, as reported by Bankrate Monitor.*

• CDs/certificates of deposit. The funds are left on deposit for several months or years to collect a set interest rate. Withdrawing the funds early requires paying a penalty fee. (The dashed green line shows 1-year CDs, and the solid blue line shows 5-year CDs.)
• Savings accounts. Funds not needed for daily expenses earn a variable interest rate. There may be limits to how often or easily money can be withdrawn. (Shown by the dotted red line.)
• Checking accounts. Money used for daily expenses can be accessed by writing checks or by using automated teller machine (ATM) cards or debit cards. Some checking accounts offer a variable interest rate. (Shown by the dashed-dotted purple line.)

Bank accounts where funds can be withdrawn more easily or at low cost generally offer relatively lower interest rates. Put differently, accounts where funds are relatively harder to turn into cash will generally offer relatively higher interest rates to attract depositors.

So, we’d expect to see a 5-year commitment to storing funds to earn you a higher interest rate than a 1-year commitment. But what do the data show us?

Between October 2022 and the time of this writing, the average interest rate on a 1-year CD was reported to be higher than the average interest rate on a 5-year CD, due to uncertainty about future financial market conditions. This type of inversion in the expected structure of interest rates is discussed in a FRED Blog post from 2018 and further described here.

*FRED recently added 15 new series from the Bankrate Monitor National Index. These weekly data report average interest rates on checking and saving accounts, certificates of deposit, credit cards, auto loans, mortgages, and other lines of personal credit. The Bankrate data are collected weekly from a survey of the “10 largest banks and thrifts in 10 large U.S. markets.” Data on CDs are available since 1984, and data on other types of deposits were added in more recent decades.

How this graph was created: Search FRED for and select “Bankrate Monitor (BRM): Certificate of Deposit APY – 5 Year CD – APY.” Click on the “Edit Graph” button and select the “Add Line” tab to search for “Bankrate Monitor (BRM): Certificate of Deposit APY – 1 Year CD – APY.” Don’t forget to click on “Add data series.” Repeat the last two steps to add data on “Saving accounts” and “Interest checking accounts.”

Suggested by Diego Mendez-Carbajo.