Opposing Powell's "transitory inflation" theory? Federal Reserve voting member: If market inflation expectations also rise, it will be a "major warning sign."

As long-term inflation expectations among households continue to rise, senior officials at the Federal Reserve are becoming increasingly concerned. They worry that if market long-term inflation expectations also begin to rise, it would undoubtedly be a "major danger signal."

According to a report by the Financial Times on Wednesday, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, warned that if investors in the U.S. bond market start to expect higher inflation, it would constitute a "major danger signal" and could completely disrupt the central bank's plans for interest rate cuts. Earlier, a closely watched survey from the University of Michigan showed that long-term inflation expectations among U.S. households have risen to their highest level since 1993.

"If you start to see market-based long-term inflation expectations begin to behave like the surveys from the past two months, I would view that as a major danger signal and an area of concern," Goolsbee said in an interview with the Financial Times.

Meanwhile, Goolsbee pointed out that the tariffs implemented by Trump have introduced new variables into the U.S. economy, making the overall economic situation increasingly complex and unpredictable. He believes that, in the face of uncertainty, the Fed's next interest rate cut may take longer than expected.

The "Golden Road" has ended, entering a "Dusty Era"

Last week, the Federal Reserve raised its inflation expectations and significantly lowered its economic growth forecasts, as Trump's tariff policies are spreading across the world's largest economy. Nevertheless, Fed Chairman Jerome Powell still expressed confidence that inflation expectations are under control, citing that market expectations remain moderate. The five-year forward inflation rate—an indicator of market expectations for price growth in the latter half of the next decade—is at 2.2%. In contrast, consumers in the University of Michigan poll expect a long-term inflation rate of 3.9%.

Goolsbee, who previously served as chief economic advisor to President Obama, noted that the Federal Reserve is no longer on the "Golden Road" seen in 2023 and 2024, when inflation seemed to be returning to the 2% target without harming economic growth or raising unemployment. We have now entered "a different chapter," where "dust is in the air."

Trump's tariffs become a key variable in decision-making

Goolsbee warned that if investor expectations begin to align with those of U.S. households, the Federal Reserve will have to take action: "In almost any scenario, you have to address this issue," he stated.

His region covers Michigan, home to many of the major U.S. automakers. He pointed out that the next three to six weeks will be a "critical period for resolving a series of policy uncertainties."

"When I talk to executives in the region, they often mention that April 2 is a key point of uncertainty for them," Goolsbee noted. Trump previously stated that he plans to announce reciprocal tariffs on U.S. trading partners on that day.

Interest rate cut expectations need recalibration

Goolsbee stated that the Federal Reserve has acknowledged that the uncertainty surrounding inflation and growth prospects triggered by Trump has hindered plans to lower interest rates from the current "tight" levels (4.25% to 4.5%). Although officials still expect to implement two quarter-point rate cuts sometime this year, the central bank maintained borrowing costs at the same level for the second consecutive meeting last weekPowell acknowledged that, partly due to tariffs, "further progress on inflation this year may be delayed."

Goolsbee believes that borrowing costs will "decrease significantly" within the next 12 to 18 months, but he warns that due to economic uncertainty, the next rate cut may take longer than expected.

My view is that when the air is filled with dust, it is the right approach to wait and see in the face of uncertainty. But waiting and seeing is not free—it comes at a cost. You gain the ability to learn new information, but lose some of the ability to act gradually