Warsh’s inflation gauge could complicate his Fed pitch

Kevin Warsh’s preferred inflation measure looks cooler now, but Bank of America warns it could force a tougher Fed stance in other periods.

Kevin Warsh’s preferred way of reading inflation may strengthen his case for a more forgiving view of prices today, but it could also limit his room to maneuver if he becomes Federal Reserve chair.

Warsh, President Donald Trump’s nominee to lead the Fed, told lawmakers at a Senate hearing Tuesday that he wants the central bank to focus more on trimmed inflation measures rather than relying primarily on the Fed’s long-favored core personal consumption expenditures price index.

The distinction matters because inflation gauges can shape how officials judge whether interest rates should stay high, fall or rise. The Fed’s core PCE measure excludes food and energy because those categories can swing sharply. Warsh said he wants to go further by setting aside the most extreme price moves to better identify the underlying trend.

“What I’m most interested in is: What’s the underlying inflation rate? Not: What’s the one-time change in prices because of a change in geopolitics or change in beef?” Warsh said at the hearing.

On current numbers, that approach appears to help his argument. Bank of America economist Aditya Bhave said a 12-month trimmed inflation gauge would have shown a mean reading of 2.3% and a median reading of 2.8% as of February, compared with core PCE at 3%. Warsh described the inflation trend as “quite favorable” during the hearing.

But Bhave warned Wednesday that the same framework could work against Warsh later. If only the most extreme price changes are removed, less dramatic increases in food or energy-related categories could still remain in the calculation and push the trimmed measure higher than the core PCE index.

Bank of America’s data suggest that has happened before. Bhave said a trimmed-median inflation gauge was above core PCE in 2019 and 2020, a setup that would have pointed toward a more hawkish Fed stance at the time.

That creates a credibility test for Warsh if he takes over the central bank. “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.

The debate lands as Warsh faces scrutiny over whether he would steer monetary policy toward Trump’s preferences. At Tuesday’s hearing, Warsh rejected the idea that he would cut rates simply because Trump wanted him to, while also facing questions about his wealth and independence from the president.

For now, the practical question is less whether trimmed measures can be useful than whether Warsh would rely on them consistently when they no longer support the policy direction he prefers.