Fed chair nominee Warsh's inflation strategy could backfire - BofA

[Federal Reserve Chair Nominee Kevin Warsh Testifies During Senate Confirmation Hearing]
Andrew Harnik/Getty Images News

Kevin Warsh, U.S. President Donald Trump’s nominee for Federal Reserve chair, told lawmakers this week he wants to change how the central bank measures inflation, though economists warn the shift could complicate his approach to monetary policy.

During his Senate confirmation hearing [https://seekingalpha.com/news/4577181-fed-chair-nominee-seeks-policy-reforms-new-framework-new-communications] Tuesday, Warsh said he prefers “trimmed average” inflation measures over the Fed’s traditional core price index for personal consumption expenditures (PCE). The trimmed approach removes extreme price movements to reveal underlying inflation trends.

“What I’m most interested in is: What’s the underlying inflation rate?” Warsh said. “We take out all of the tail-risks, all of the one-off items, and we ask ourselves whether the generalized change in prices is having second-order effects on the economy.”

Bank of America economist Aditya Bhave reportedly noted that while trimmed measures currently show softer inflation—a 2.3% mean compared with core PCE at 3%—the strategy carries risks.

Bhave warned that food and energy prices, currently excluded from core PCE, could still influence trimmed readings during volatile periods. Historical data shows trimmed-median inflation exceeded core PCE in 2019 and 2020, which would have encouraged a more hawkish Fed stance.

“To preserve Fed credibility and avoid optics of cherry picking, Warsh will need to stick with his preferred metrics even when they are outpacing the core,” Bhave said, CNBC reported.
[Bank of America]
Bank of America

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