The Federal Reserve under its likely next chair, Kevin Warsh, may adopt a new way of looking at inflation that shows price pressures are already near the central bank’s target. Warsh has championed the Dallas Fed’s trimmed mean inflation gauge, which ran at 2.4 percent in March, significantly below the 3.2 percent reading from the Fed’s current preferred measure, the core personal consumption expenditures (PCE) index.
“The data that’s being used to judge inflation is quite imperfect,” Warsh told the Senate Banking Committee recently, arguing for using “trimmed averages” to evaluate the “underlying, generalized change in prices in the economy.”
The difference between the two metrics could determine the Fed’s next move. While core PCE remains well above the Fed’s two percent target, the trimmed mean reading is close enough that some might declare victory. The gap could provide the rationale for cutting interest rates, a move President Trump has publicly demanded. The Fed’s last rate decision held rates at a 23-year high of 3.50%-3.75%, but a rare four-way dissent signaled deep divisions over the path forward.
A formal shift to the trimmed mean gauge could justify a more dovish policy stance, but Warsh would need to convince his colleagues on the policy-setting committee. The move would also risk accusations of political manipulation, especially as outgoing chair Jerome Powell remains on the board and faces a lingering criminal probe that has created unprecedented tensions within the institution. The next trimmed mean data is set for release on May 28.
A Tale of Two Measures
The two inflation gauges differ in what they exclude. The core PCE index, the Fed’s longtime favorite, strips out volatile food and energy prices every month. The trimmed mean measure is more dynamic; each month it lops off the spending categories with the most extreme price swings at both ends of the spectrum.
In March, for example, the Dallas Fed’s calculation excluded a 60.2 percent annualized jump in computer software prices and a 27 percent annual drop in tax preparation service costs. Both of these were included in the core PCE calculation. While Dallas Fed research suggests the trimmed mean is a better real-time indicator of underlying inflation, other measures from the Cleveland Fed and New York Fed painted a picture closer to the headline number in March.
Political Pressures and Market Hopes
The potential policy shift comes during a tense transition. An investigation into Powell, though suspended, has been a source of political friction. Attorney Jeanine Pirro has indicated she may reopen it pending a report from the Fed’s inspector general. President Trump has also said the probe is “not dropped.”
A more dovish Fed chair could be a “bull catalyst” for assets like Bitcoin, according to Galaxy Digital CEO Mike Novogratz. However, he remains skeptical of near-term rate cuts, citing “ugly inflation prints” in the pipeline.
The primary risk for the trimmed mean gauge is that it can misread the economic tea leaves. The Dallas Fed itself has noted that the measure can understate inflation when broad-based price increases, such as those from tariffs, affect many goods simultaneously. The gauge also lagged behind core PCE in identifying the start of the inflationary surge in 2021. Adopting it now, just as a new chair under pressure to cut rates takes over, would invite accusations that the Fed is simply moving the goalposts to suit a political agenda.
This article is for informational purposes only and does not constitute investment advice.
