Fed Chair Nominee Kevin Warsh's Preferred Inflation Measure Could Backfire
As Kevin Warsh faces Senate confirmation to head the Federal Reserve, economists warn his preferred "trimmed" inflation metric—which shows inflation softer than the official core PCE measure—may tie his hands if actual inflation outpaces his preferred gauge.
Warsh's Inflation Framework
Warsh stated "The measures I prefer are looking at things that are called trimmed averages. 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's Caution
Bank of America found a 12-month inflation gauge using the trimmed method would have a mean of 2.3% and median of 2.8% as of February, though economist Aditya Bhave warned that such a recalculation might not pan out as the former Fed governor hopes.
The Credibility Trap
If trimmed inflation outpaced the core PCE in the future, Warsh would likely have to stand by his view, tying his hands, as 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.
Concerns About Independence
Critics of Warsh said they expect him to sway the Fed in a direction that appeases Trump rather than by what's best for the economy.