Despite the recent moderate inflation data in the United States, the Federal Reserve is expected to maintain the current interest rate level at this week's policy meeting due to increased uncertainty brought about by tariff policies, continuing its &#34;wait-and-see&#34; stance.
On Tuesday local time, Nick Timiraos, a well-known journalist from &#34;The Wall Street Journal,&#34; posted on social media platform X:
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There is ample reason to believe that if it weren't for the risks posed by tariffs to prices, the Federal Reserve would be ready to cut rates this week, as inflation has improved recently. I believe the past five years have changed people's views on inflation.
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Timiraos also noted in an article for &#34;The Wall Street Journal&#34; that the Federal Reserve is currently in a &#34;wait-and-see&#34; mode, observing whether inflation expectations or the labor market deteriorate first.
He stated that the CPI data over the past three months indicates a slowdown in inflation growth, leading the market to briefly expect that the Federal Reserve might initiate a rate-cutting cycle. However, officials are currently more focused on changes in &#34;inflation expectations&#34;—that is, consumers' and businesses' views on future prices. This indicator, while not directly observable, has a significant impact on actual inflation trends. Timiraos wrote:
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Expectations are difficult to measure and are crucial for the Federal Reserve. Economic theory suggests that expectations play a vital role in determining actual inflation.
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The Federal Reserve's interest rate decision for June will be announced this Thursday. The market generally believes that the Federal Reserve will continue to hold steady, keeping the federal funds rate in the range of 4.25%-4.5%. At that time, the Federal Reserve will also release its latest economic forecast summary.
<h2>What the Federal Reserve Really Cares About is Inflation Expectations</h2>
The article points out that economic theory suggests that when businesses expect future costs to rise, they will raise prices in advance to pass on costs; if workers expect living costs to increase, they will also demand higher wages. If this psychological expectation spreads, it could lead to self-reinforcing inflation.
Alan Detmeister, an economist at investment bank UBS Group, noted:
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If everyone expects inflation to rise, then inflation will indeed rise. This is precisely what the Federal Reserve is concerned about.
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Therefore, Timiraos concludes:
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Whether the Federal Reserve cuts rates this year and the extent of any cuts will partly depend on how officials view the risks of inflation expectations.
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However, recent data shows subtle changes in U.S. inflation expectations. The University of Michigan's consumer survey this spring indicated a rare increase in both short-term and long-term inflation expectations; however, this trend has eased somewhat with the temporary suspension of certain tariff policies. Another consumer survey from the New York Fed showed only a slight increase.
Some economists warn that businesses may have become accustomed to raising prices to gain profits and may test consumers' tolerance again this summer. Ray Farris, chief economist at Eastspring Investments, stated:
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The Federal Reserve's decision to remain on hold at this moment is the right one. Any rise in inflation expectations should make the Fed uneasy.
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John Williams, President of the New York Fed, also issued a warning last month, stating that one should not be complacent about the stability of inflation expectations. He noted that the past few years since the pandemic have changed the public's perception of inflation—the difference in inflation expectations between younger and older individuals has disappeared.
Moreover, unlike the 1970s, this round of inflation has eased without triggering a severe economic recession, partly because the public has not formed the expectation that high inflation will persist. In contrast, the high inflation of the last century was curbed only after the economic contraction caused by interest rate hikes in the 1980s.
<h2>Under the shadow of tariffs, the labor market remains a balancing variable</h2>
Currently, the U.S. government's fluctuating tariff policies have further complicated the situation.
Raphael Bostic, President of the Atlanta Fed, stated that continuous tariff negotiations and implementations would trigger &#34;psychological reactions&#34; in the market. However, Fed Governor Christopher Waller believes that the price increases caused by tariffs may be one-time events and insufficient to create sustained inflation.
Waller admitted that this view might evoke memories of the Fed's misjudgment in 2021 when it deemed inflation to be &#34;transitory,&#34; but he emphasized that the current situation is different: interest rates are no longer at extremely low levels, fiscal stimulus has significantly decreased, and the labor and housing markets are no longer overheated.
He also pointed out that although consumer surveys reflect concerns about rising prices, in the context of a slowing labor market, workers may struggle to negotiate higher wages, thus lacking the foundation for a &#34;second-round inflation shock.&#34; &#34;Today's workers are more concerned about keeping their jobs,&#34; Waller said.
Timiraos' article noted that most economists believe that if the labor market remains weak, it will weaken companies' pricing power, thereby preventing inflation from rising. Gregory Daco, Chief Economist at EY, stated:
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Companies will be forced to offset rising costs through layoffs and other means.
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At the end of the article, Timiraos wrote, &#34;The Fed does not want to make a mistake,&#34; and it must weigh two important factors: the rise in inflation expectations and the deterioration of the labor market, which is more likely to occur, and which has a higher cost

Timiraos wrote, "The Federal Reserve does not want to make a mistake." It must weigh two important factors: the rise in inflation expectations and the deterioration of the labor market, which is more likely to occur, and which has a higher cost

- Despite recent moderate inflation data in the U.S., the Federal Reserve is expected to maintain current interest rates due to uncertainties from tariff policies.  
- Notable economist Nick Timiraos highlighted that inflation expectations are crucial, as they can influence actual inflation trends, with recent surveys indicating subtle changes in these expectations.  
- The Fed faces a challenging decision between tolerating rising inflation expectations and preventing economic slowdown, with potential significant consequences for either misjudgment.

"New Federal Reserve News Agency": If it weren't for tariffs, the Federal Reserve would cut interest rates this week