Kevin Warsh’s preferred inflation measure could come back to bite him
Kevin Warsh, the nominee for Federal Reserve chair by President Donald Trump, has proposed a change in the central bank’s strategy for measuring inflation. Warsh believes that the current method, which focuses on the core price index for personal consumption expenditures (PCE), should be updated to exclude extreme price shocks. He argues that by looking at trimmed averages, which remove one-off items and tail-risks, a more accurate picture of underlying inflation can be obtained.
Bank of America economist Aditya Bhave has raised concerns about Warsh’s proposed changes. Bhave warns that while Warsh’s trimmed method may show softer inflation rates currently, it could also lead to a higher inflation reading in the future. By excluding only the most extreme readings, minor spikes in inflation, particularly from food and energy prices, could have a greater impact and push the overall inflation rate higher.
In the past, Bank of America’s data has shown that a trimmed-median inflation gauge was higher than the core PCE in certain years, prompting a more hawkish stance from the Fed. Bhave believes that if trimmed inflation continues to outpace the core PCE, Warsh may be forced to stick with his preferred metrics, even if they suggest a need for tighter monetary policy.
Critics of Warsh have expressed concerns that his policies may be influenced by President Trump rather than what’s best for the economy. During his Senate hearing, Warsh denied accusations of being swayed by Trump and emphasized the importance of maintaining Fed credibility. However, questions have been raised about his ability to maintain independence from political pressures.
Overall, Warsh’s proposed changes to how inflation is measured at the Fed could have significant implications for monetary policy. While his trimmed method may provide a more nuanced view of inflation, it also carries the risk of potentially skewing policy decisions in the future. It remains to be seen how Warsh will navigate these challenges if confirmed as Federal Reserve chair.
