Kevin Warsh gave his preferred way for measuring inflation. It could come back to bite him

• Trimmed mean inflation currently shows 2.3% mean and 2.8% median as of February, compared to 3% for core PCE, making inflation appear softer today
• Bank of America data shows trimmed measures ran higher than core PCE in 2019-2020, meaning Warsh's preferred method could have encouraged tighter policy in those years
• Bhave warns that excluding only extreme readings could allow food and energy price spikes to enter the calculation, potentially raising inflation readings and limiting Warsh's policy flexibility

Summary

Federal Reserve chair nominee Kevin Warsh has proposed changing how the central bank measures inflation, favoring "trimmed averages" over the current core PCE (Personal Consumption Expenditures) index. This method would exclude extreme price shocks and one-off items to better capture underlying inflation trends, rather than temporary fluctuations from geopolitical events or specific commodities.

Key Figures:

• Current core PCE inflation: 3% (February)
• Trimmed mean inflation: 2.3% mean, 2.8% median (February, per Bank of America)

The Irony:

Bank of America economist Aditya Bhave warns this approach could backfire. While trimmed metrics currently show softer inflation, they may actually include more food and energy price volatility that Warsh aims to exclude. By only trimming the most extreme readings, minor spikes could remain in calculations, potentially producing higher inflation readings than core PCE.

Historical Context:

Bank of America data shows trimmed-median inflation exceeded core PCE in 2019 and 2020, which would have encouraged more hawkish (higher interest rate) Fed policy during those years.

Market Implications:

If Warsh adopts this methodology, he may be locked into maintaining it even when trimmed inflation runs hotter than core PCE, limiting policy flexibility. Bhave notes that switching metrics inconsistently could damage Fed credibility and appear as "cherry picking."

Political Considerations:

Warsh faces scrutiny over potential political influence from President Trump regarding interest rate decisions, though he denied he would lower rates solely at presidential request. His confirmation hearing revealed concerns about his ability to maintain Fed independence.