Wash hopes to change the way the Federal Reserve measures inflation. However, economists warn that this adjustment could make its monetary policy operations more complex.
According to Zhitong Finance, Kevin Wash, the U.S. President Trump's nominee for the next Federal Reserve Chair, stated during his Senate confirmation hearing on Tuesday that he wants to change how the central bank measures inflation. Wash indicated that he prefers using a 'trimmed average' inflation indicator rather than the core Personal Consumption Expenditures Price Index (PCE) traditionally used by the Fed. Wash said, 'What I care most about is what the underlying inflation rate is? We exclude all tail risks, all one-off factors, and then assess whether the broad-based changes in prices are having second-order effects on the economy.'
The 'trimmed average' inflation indicator, which Wash emphasized and praised, is based on the Personal Consumption Expenditures Price Index and filters out the most extreme categories of monthly price fluctuations regularly to eliminate temporary noise and reveal a purer trend of inflation. It is this algorithm that excludes outliers and has painted a dramatically different picture of prices over the past six months—one that diverges sharply from public perception and traditional data. The trimmed average inflation rate was only 2%, while the unadjusted PCE index remained high at 3.4% during the same period.
The significant gap of 1.4 percentage points between the trimmed mean inflation and PCE data provides potential policy flexibility for Wash. Analysts noted that if, under her leadership, theFederal Open Market Committee(FOMC) shifts to favoring trimmed mean inflation as a decision-making basis, then even if traditional PCE remains high due to geopolitical conflicts and energy premiums, the door to interest rate cuts could still be nudged open through statistical narrowness. This implies that the focus of subsequent interest rate path negotiations will subtly shift from the absolute level of inflation to a contest over the 'definition of trends.'
Although Wash did not explicitly mention easing during Tuesday's hearing, he quietly unveiled a statistical tool for redefining inflation. Once his nomination is confirmed, the incoming Fed Chair's preference for trimmed average inflation may provide him with a rationale for cutting rates when faced with political demands from the White House.
However, economists warn that this adjustment could complicate the Fed’s monetary policy operations. Aditya Bhave, an economist at Bank of America, pointed out that despite the current trimmed average indicator showing lower inflation levels, this strategy still carries risks.
Bhave warned that food and energy prices, currently excluded from the core PCE, might still affect the readings of the trimmed average indicator during volatile periods. Historical data shows that in 2019 and 2020, trimmed average inflation was higher than core PCE, which could have prompted the Fed to adopt a more hawkish policy stance. Bhave said, 'To maintain the credibility of the Federal Reserve and avoid the perception of selectively using data, Wash needs to stick to these indicators even when his preferred metrics exceed core inflation.'
Wash's "Mission Impossible": Taming Inflation While Pleasing Trump
An increasing number of senior macroeconomists on Wall Street believe that Wash faces an almost impossible task—curbing inflation while pleasing Trump, who nominated him. Wash believes that an important sign of the Fed’s success in monetary policy is that no one talks about inflation anymore. However, achieving this would likely mean the Fed Chair nominee cannot please the president who appointed him in the short term.
Just an hour before Wash attended his nomination hearing on Tuesday, Trump reiterated his stance on interest rates. In an interview, Trump was forthright—if the new Fed Chair does not immediately lower borrowing costs after taking office, he will be very disappointed.
Warsh then faced a two-hour grilling by the Senate Banking Committee. Amidst a barrage of questions from lawmakers, Warsh remained highly professional and resolute. He staunchly defended the Fed’s independence, asserting that Trump had not asked him to commit to any interest rate decisions, and emphasized that even if such a request were made, he would not comply.
Although Warsh painted a grand vision during the hearing — including a policy framework transformation, deeper data analysis, and a reevaluation of the balance sheet — the reality he faces is extremely harsh. Achieving his vision of 'price stability' by the end of the year would be akin to completing a 'mission impossible.'
Warsh echoed former Fed Chair Alan Greenspan’s view, defining the core mission of 'price stability' as the point at which price fluctuations are so minimal that 'no one talks about them anymore.' In other words, true stability is achieved only when price volatility no longer influences household or business decisions. It was precisely this logic that led Greenspan to set the inflation target at 2%.
However, silencing businesses and households regarding price hikes could take several months. The current situation is far from optimistic: due to shocks triggered by the oil crisis, overall inflation has surged to its highest level in nearly two years, exceeding the Fed’s 2% target by more than a full percentage point.
In fact, even before tensions escalated due to the situation in Iran, the core inflation metric monitored by the Fed had already exceeded its target. In the short term, few Americans are likely to stop discussing or paying attention to inflation. The latest survey from the University of Michigan shows that consumer expectations for inflation over the next year surged to 4.8% this month, hitting a seven-month high. Meanwhile, ISM surveys also indicate that companies’ input costs last month reached their highest level since the inflation spike of 2022.
Based on the available data, the U.S. is far from achieving what is termed 'price stability.' If 'nobody talking about inflation' is the ultimate measure of success, then the Fed still has a long way to go before claiming victory.
If Warsh is ultimately confirmed to succeed Powell, his top priority upon taking office next month will be navigating a complex economic landscape. During the hearing, he outlined a series of reform ideas, including examining gaps in inflation data collection, focusing on productivity gains driven by artificial intelligence, adopting forward-looking decision-making, and gradually reducing the Fed’s massive balance sheet to create room for future rate cuts.
However, even if these measures eventually provide justification for rate cuts, initiating a rate-cutting cycle right at the start of his term seems somewhat untimely, if not counterproductive, given the current backdrop of widespread complaints from both labor and businesses about rising prices.
The market has already keenly picked up on this. Interest rate futures markets show that the probability of the Fed cutting rates this year is now less than 50%, and expectations for the next rate cut have been pushed back to 12 months later.
For investors who had bet that a Fed chair nominated by Trump would be compliant with the White House, the prospect of an interest rate cut by the Federal Reserve is becoming dimmer. Wash’s heightened focus on 'balance sheet reduction' during the hearing further tightened policy expectations. Based on the current situation, it is highly likely that Trump will be disappointed, especially in this critical midterm election year.
When discussing potential political pressure, Wash's stance was very clear. He stated, 'Inflation is a choice, and the Federal Reserve must take responsibility for it.' He believed that while the government has the right to express its views, 'the independence of the Federal Reserve largely depends on the Fed itself.'
However, not everyone is optimistic about this. Former Federal Reserve economist Claudia Sahm criticized that Wash’s rhetoric overlooks reality. She pointed out that the pressure Trump exerts on the Federal Reserve goes far beyond words. A Fed chair willing to defy Trump’s wishes would need not only 'the courage to listen,' but also sufficient resources to withstand potential legal challenges.
Editor/Deng