The Fuse the Fed Is Watching Closely

• NY Fed one-year inflation expectations rose from 3.4% to 3.6%.

• Three- and five-year expectations were little changed.

• It’s a signal consumers are less worried about the long-term outlook.

The real risk to markets right now isn’t inflation itself, it’s what consumers think comes next…

Since the turn of the year, Wall Street has been fixated on how consumers see the path of prices. Economists understand that central bankers track forward‑looking inflation signals with almost obsessive precision. If those indicators start to climb in a persistent way, it forces policymakers to reconsider the trajectory of monetary policy.

The Federal Reserve’s worry is straightforward: inflation expectations can morph into reality. When consumers think prices will accelerate later, they change their behavior now. They buy ahead of time. They stockpile. They pull future demand into the present. And if that rush drains inventories, it only adds more upward pressure to prices.

To see this dynamic in action, look at the New York Fed’s quarterly data on household spending expectations. The latest reading shows overall outlay expectations holding steady relative to December. Historically, these expectations have tended to rise and fall alongside the broader inflation cycle…

Based on the same NY Fed data, households’ inflation expectations are holding relatively steady. The outlook for price growth has increased in the short term, but held steady in the longer term. In fact, expectations are right around their long-term averages. As long as they stay anchored, that’s a signal to the Fed that it can afford to leave monetary policy unchanged as it waits for a resolution in the Middle East. That cushion supports a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

Recently, the New York Fed released its Survey of Consumer Expectations for April. It summarizes responses from 1,300 households on inflation, household finances, and the labor and housing markets. The survey rotates participants to keep the sample fresh.

This survey gives policymakers a window into how people think and how they’re likely to behave. These readings matter because they show whether households expect inflation to keep climbing or drift back toward normal. And based on the latest results, near‑term expectations were little changed last month…

Inflation expectations for the next 12 months rose to 3.6%, up from 3.4% in March. For context, the NY Fed’s records going back to 2013 show this gauge averaging just above 3.3%. The arc is clear: expectations spiked in 2021 and 2022 as prices surged, then settled back toward 3% once the pandemic stimulus faded. After a bumpy start to 2025, the measure still remains within its recent range.

The longer‑term picture tells the same story. Consumers haven’t shown signs of bracing for a new wave of price growth. The three‑year inflation expectation remained at 3.1% in April. That’s still right in line with the survey’s historical norm. No sign yet of the runaway narrative the media keeps trying to resurrect…

Move out to five years, and the pattern holds. Expectations stayed at 3% for the eighth straight month, just above the longer‑term average based on data going back to early 2022…

As noted at the start, the Fed pays close attention to these numbers. Policymakers want to know how much support they can introduce for the economy without reigniting the long‑term inflation surge we saw in 2021. We’ve had a few bumps, but nothing that resembles a repeat episode, at least not according to the NY Fed’s latest read.

The pace of annualized inflation growth jumped to 3.8% in April, the highest since early 2025. The culprit was higher oil prices tied to the conflict in Iran. Yet Fed Chair Powell has indicated the central bank is willing to look through the shift. Policymakers don’t want to react too quickly to an event that could prove short‑lived in the grand scheme of things. But their patience could be tested if the Middle East standoff continues to drag out.

This is why the NY Fed’s expectations data becomes an important tell. If households remain anchored, and so far they are, the Fed doesn’t need to rush into rate hikes. In fact, if tensions in the Middle East ease sooner rather than later, the central bank could wind up with room to keep supporting domestic expansion later this year or early next. That backdrop would help to ease borrowing costs, stoke the economy, and underpin a long‑term, steady rally in the S&P 500.

Five Stories Moving the Market:

U.S. President Donald Trump said negotiations with Iran over an interim deal to extend their ceasefire and reopen the Strait of Hormuz were “proceeding nicely”; he also urged Saudi Arabia, Qatar and other countries to join the Abraham Accords – Bloomberg. (Why you should care – Middle Eastern governments, including Saudi Arabia and Israel, are said to have backed the terms of the U.S. proposal)

The U.S. and Iran are ‌discussing a plan to open the Strait of Hormuz about 30 ​days after the two ​countries reach a deal to ⁠end hostilities; Iran would proceed to clear mines from the ​strait during a 30-day window ​following an agreement, after which ships ‌from ⁠all countries would be able to navigate freely and safely – Reuters. (Why you should care – such an agreement would allow for shipping traffic to return to normal with no single country in control of the Strait)

The U.S. sank two Islamic Revolutionary Guard Corps ships attempting to lay mines in the Strait of Hormuz; Iran responded by launching surface-to-air missiles at U.S. planes, prompting American attacks on missile launchers near Bandar Abbas, according to U.S. official – WSJ. (Why you should care – the U.S. said it is defending its forces while exercising restraint during the ongoing ceasefire)

U.S. President Donald Trump said he was in no hurry to complete an end-of-war agreement with Iran after spending weeks insisting Tehran had to quickly make nuclear concessions or face renewed attacks; Trump said the U.S. blockade on Iranian shipping would remain in place until an agreement “is reached, certified, and signed” – WSJ. (Why you should care – Iranian officials want to end the blockade but appear to be hesitant on giving up nuclear ambitions)

A supertanker hauling Iraqi crude to China has left the Persian Gulf and crossed the U.S. blockade line into the Arabian Sea, as talks continue to end the war between the US and Iran and reopen the Strait of Hormuz – Bloomberg. (Why you should care – U.S. officials remain optimistic a deal can be reached with Iran)

Economic Calendar:

Earnings: AZO, MOD, SKY, SMTC, ZS

ECB Financial Stability Review (4 a.m.)

U.S. – Chicago Fed National Activity Index for April (8:30 a.m.)

U.S. – FHFA House Price Index for March (9 a.m.)

U.S. – S&P CoreLogic Case-Shiller Home Price Index for March (9 a.m.)

U.S. – Conference Board Consumer Confidence for May (10 a.m.)

U.S. – Dallas Fed Manufacturing Index for May (10:30 a.m.)

Treasury Auctions $89 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $77 Billion in 26-Week Bills (11:30 a.m.)

Treasury Auctions $85 Billion in 6-Week Bills (1 p.m.)

Treasury Auctions $69 Billion in 2-Year Notes (1 p.m.)

U.S. - American Petroleum Institute Crude Oil Inventory Data (4:30 p.m.)

BOJ’s Ueda (Governor) Speaks (8 p.m.)