Kevin Warsh's preferred inflation measure could come back to bite him

Key Points:

• Kevin Warsh, President Trump's nominee for Federal Reserve chair, proposed changing the Fed's inflation measurement strategy to focus on trimmed averages that exclude extreme price shocks, aiming to identify the underlying inflation rate more accurately.
• Bank of America economist Aditya Bhave cautioned that Warsh's preferred trimmed inflation gauge might not always show softer inflation and could lead to higher inflation readings than the current core PCE measure, potentially complicating Fed policy decisions.
• Bhave noted that in past years, trimmed inflation measures exceeded core PCE, which would have prompted a more hawkish Fed stance, and warned that Warsh might be compelled to maintain his preferred metrics even if they conflict with other indicators.
• Critics expressed concern that Warsh's approach could align the Fed's policy more closely with President Trump's preferences rather than economic fundamentals, though Warsh denied he would lower interest rates merely to please Trump.
• During his Senate hearing, Warsh faced scrutiny over his wealth and independence from Trump, highlighting skepticism about his ability to lead the Fed impartially.