Odd it seems so alien to you, as it's how the vast majority of RPGs work. The DM can do anything they want, on a whim. The DM being beyond, above and outside the rules is really the whole point of a DM.
Yes. The GM is in full control of the game reality and have omnisight into everything as they are outside the game reality. The hostile players jump right to the wacky far extreme of the GM controlling characters like robots....but that is just beyond silly.
You could play a hardcore cutthroat game where the GM tells the players nothing about their characters, but that is an extreme game style. The mind of the character, and that is the mind of the player, can only role play thoughts and feelings they know about. But both the character and player don't have the GMs outside view. Simply put, a player can not role play their characters unconscious mind. Even IF the GM told the player all the needed outside the game information....it would STILL be the GM telling the player what their character feels and thinks.
It can be easy for some people, when say they meet a guy selling items of value on a street corner cheep, to feel and think "something is not right" by the conscious mind using common sense, your knowledge and logic. But you also have an unconscious mind....those thoughts, feelings, instincts and your "gut" that all tell you things that you don't have hard facts or data on. You can feel something is "wrong" or "off", and have no idea why you feel that way. Your instincts might tell you to trust someone or NOT to trust them....but again you won't know why. And you know your Real Life "gut" is quite often correct, amazingly.
So when a Character meets a halfing merchant, the conscious mind of the player/character might think or feel something based on what they see and hear. But the player can't role play the "gut" or unconscious mind. Only the GM can do that, as they know everything. So if the halfling is planning on cheating the character, only the GM knows that (as they are role playing the halfling merchant after all) and ONLY the GM can tell the player if their character thinks or feels "something is off" or anything else.
Also, just to note, plenty of games have "the GM tells the players how their characters think or feel" right in the rules. When a player makes a roll to see if their character detects or feels or thinks something: it's the GM that tells the player what it is. For example, when a character senses a motive of someone, it's the GM telling the character what they sense.