Federal Reserve officials are grappling with a tricky challenge as they debate the proper setting of monetary policy: accurately predicting where inflation is headed, particularly over the longer term. Despite expectations about future price movements exerting a strong influence on current levels of inflation, officials face uncertainty about how long the impact of President Donald Trump’s global trade war will last.
Recent surveys from the University of Michigan and the Federal Reserve Bank of New York have shown shifts in near-term expectations, but their longer-run readings have diverged. Market-based measures, however, have remained relatively stable. This divergence has led policymakers to question what is really happening with inflation expectations.
Fed Governor Christopher Waller notes that there is a “dramatic disparity” between the data from these surveys. He attributes this discrepancy to methodological changes in the Michigan survey, which has raised concerns about its reliability. However, Joanne Hsu, director of the University of Michigan’s Survey of Consumers, disputes this claim and argues that the shift to web-based interviews has not affected the findings.
Hsu emphasizes that the quality of the survey outcomes depends on a diverse range of respondents, including informed and uninformed individuals from different income groups. She believes that this diversity is essential for capturing the truest expression of expected inflation.
As policymakers navigate these complex data points, they must also consider the impact of President Trump’s trade policies on inflation expectations. While the Fed is expected to hold interest rates steady in its upcoming meeting, the question remains when and if the central bank will cut rates, as it penciled in last March.
The uncertainty surrounding long-term inflation outlooks has created anxiety among the public, with many expressing concern about the potential for persistent price increases.
Source: https://www.reuters.com/business/officials-head-into-fed-meeting-with-uncertain-long-term-inflation-outlook-2025-06-18