Kevin Warsh, President Donald Trump's nominee for Federal Reserve chair, proposed changing how the central bank measures inflation during his Senate hearing. Warsh favors using trimmed averages to exclude extreme price shocks, arguing this would better reflect underlying inflation trends. Bank of America economist Aditya Bhave warned that such a shift could inadvertently amplify the impact of food and energy prices on Fed policy. Meanwhile, Warsh also criticized the Fed's communication strategy, advocating for less transparency and fewer public signals about future rate decisions.
Warsh's Inflation Proposal
Warsh argued that the Fed's current reliance on the core PCE index, which excludes volatile food and energy prices, should be refined further. He proposed using trimmed averages to remove extreme price movements, stating, '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?' According to Bank of America, a trimmed inflation gauge would have shown a mean of 2.3% and a median of 2.8% as of February, compared to the core PCE's 3%. Warsh called the current inflation trend 'quite favorable.'
Criticism and Risks
Bhave cautioned that Warsh's approach could backfire. By trimming only the most extreme readings, minor spikes—such as those caused by rising food or energy prices—might still influence the trimmed mean. 'Even if these shocks get trimmed out, they might still raise the trimmed mean by preventing other shocks from getting trimmed,' Bhave said. This contradicts Warsh's argument for ignoring one-off, supply-driven price increases.
Communication Shift
Warsh also proposed reducing the Fed's transparency, arguing that excessive communication leads to market expectations and broken promises. He criticized the Fed's dot plot—a chart showing policymakers' rate expectations—and suggested the central bank should make decisions in meetings rather than signaling them in advance. 'The Fed tells the whole world what their dots are going to be... but the Fed’s human, and they hold on to those forecasts longer than they should,' Warsh said. This stance contrasts with the current Fed's practice of regular press briefings and public updates from regional bank presidents.
Market Reaction
Wall Street analysts have grown accustomed to the Fed's transparency under Chair Jerome Powell. Warsh's proposed changes could disrupt investor expectations, as markets rely on forward guidance to anticipate policy shifts. His preference for a 'backseat Fed'—one that communicates less and acts more deliberately—may face resistance from those who value predictability in monetary policy.