Control Panel: Kevin Warsh and inflation

Investment Analysis Clubs Macro Economic Trends and Risks
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As all METARs know by now, the Chair of the Federal Reserve and FOMC is now Kevin Warsh.

At the swearing-in ceremony for Federal Reserve Chair Kevin Warsh on May 22, 2026, President Trump stated that he wanted Warsh to be “totally independent” in his new role. But everyone knows that Trump wants the fed funds rate to be cut to zero again and put immense pressure on ex-Fed Chair Powell to cut.

I’m not pleased to see that the first Warsh action out of the gate is to try to use a biased inflation measure to justify cutting rates.

https://www.wsj.com/economy/central-banking/kevin-warsh-wants-the-fed-to-think-about-inflation-differently-64272e0a?mod=hp_lead_pos4

Kevin Warsh Wants the Fed to Think About Inflation Differently

To measure underlying inflation, the new chairman has urged the central bank to look at alternatives to its standard gauge

By Nick Timiraos, The Wall Street Journal, May 31, 2026

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  • Fed Chairman Kevin Warsh is urging the central bank to pay more attention to alternative measures of inflation when deciding on interest rates.

  • Warsh believes that “trimmed mean” gauges better filter out one-off price changes from tariffs, AI investment, and geopolitical shocks.

  • The Dallas Fed’s trimmed mean index shows inflation currently is lower than indicated by the Fed’s preferred gauge, but it failed to register price increases in 2021.

At his confirmation hearing in April, Fed Chairman Kevin Warsh urged the central bank to pay more attention to measures like the trimmed mean, turning what had been a technical debate among economists into a live question for policy.

The question is whether these alternative measures are better at filtering out the effects of tariffs, AI investment and geopolitical shocks to produce a more accurate (and, for now, benign) picture of where underlying inflation is headed. Or do they understate underlying pressure because those same effects aren’t actually one-offs but persistent forces shaping the economy?..

The consumer-price index, released by the Labor Department, tends to get the most headlines because it comes out early in the month and because Social Security payments, inflation-protected bonds and private contracts are tied to it.

But Fed officials pay more attention to the Commerce Department’s personal-consumption expenditures price index, or PCE, which the central bank uses to define its inflation target. The measure captures a broader range of spending and adjusts for how consumers shift between products as prices change. Overall PCE inflation was 3.8% in April…

From 1977 to 2009, price declines tended to be steeper than price increases. Excluding both equally would have biased the trend in inflation upward. To remove that bias, the Dallas Fed designed its index to discard the 31% biggest increases in a given month, but only the 24% biggest decreases… [end quote]

Inflation is additive. The Fed hates deflation so prices will never come back down to what they were before. So-called “one-off” inflation that the Fed wants to ignore is permanently baked into higher prices even if they stabilize (so-called “disinflation”). People on fixed incomes or minimum wage, among others, are suffering.

To exclude essential products like food and fuel because their prices can be volatile is bogus, in my opinion. To trim out price rises due to tariffs, gigantic AI investment, and supply chain disruptions like closing the Strait of Hormuz, is bogus because those prices won’t come down. Lower inflation does not mean return to lower prices.

The Fed is trying to tease out an “underlying trend” but this doesn’t make sense to me, especially when the “trimmed” data is asymmetrical.

And especially when the “trimmed” data gives politically-motivated data that contradicts real-world observation and is clearly an outlier.

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Inflation is clearly higher than the Fed’s stated target of 2%. I’m enraged to hear that the new Fed chair is trying to obscure this with a biased, manipulated index.

The Atlanta Fed’s Latest GDPNow Estimate for 2026:Q2, Updated: May 28, 2026, is 3.8%, a strong growth reading which argues against a fed funds cut.

The options market is very aware of this. Traders are not predicting any fed funds cut in 2026. There is a 50-50 chance of a fed funds raise in 2026.

The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, shows stable loose money conditions.

The bond market isn’t pricing in future inflation risk. The 10-Year Treasury Real Interest Rate has fluctuated in a stable channel under 2% since 2022.

The Treasury yield curve dropped slightly along its entire length last week.

Stock indexes continue to climb. Margin debt rose to another record, helping to inflate the bubble. The Fear and Greed Index is in Greed. The trade is risk-on as stock prices are climbing faster than the 10 year Treasury price. (Bond prices rise when yields fall.)

The Price-to- earnings ratio based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted P/E Ratio (CAPE Ratio), rose further to bubble heights.

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Oil and gasoline prices stabilized after the 2026 run-up. Natgas is rising after falling from its peak. USD and silver stabilized. Gold fell while copper rose. Bitcoin fell.

The negotiations over opening the Iranian blockade of the Strait of Hormuz are ongoing. Several key commodities, including oil, fertilizer and helium, are impacted. When will the Strait open? I won’t speculate. I’ll believe it when I see it. Even if a memorandum of understanding is signed and the strait officially reopens tomorrow, logistics experts warn it will take weeks to clear naval mines, restore damaged regional refining infrastructure, and normalize global shipping schedules.

The METAR for next week is sunny.

Wendy

https://en.macromicro.me/charts/415/us-margin-debt

https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

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I recently posted on how I had adjusted my personal long-term inflation projection up from 3% to 5%. While I am still wondering whether that was the right level to settle at, I have yet to see a compelling reason to take it down.

In addition, 2025 was my year of investing in efficiency. I put solar panels on my roof and bought a second (used) plug-in hybrid vehicle. (It replaced our use of a 2009 minivan… A car was already in the picture, so the plug-in feature was a slight upcharge over a pre-existing plan.) I just paid my May household gas and electric bill. It was $3.44. Thanks to an over-production of electricity vs. the household demand, the net metering credit satisfied nearly all of the natural gas bill.

Given the recent spike in gasoline prices and the continuing increases in electricity prices, that choice turned out to be a surprisingly prescient move. Remember that the $3.44 included local driving for two plug-in hybrid vehicles, on top of standard household energy usage.

Still, those savings have essentially been eaten up by higher food, property tax, and insurance bills. While I’m thankful for the savings from the panels, I’m also acutely aware that without them, we’d be paying higher gasoline and electricity bills on top of those higher food, property tax, and insurance bills.

Then, instead of essentially a wash when it comes to these core costs, we’d be figuring out what needed to be cut. Net, for this year only, our household’s cost of standing still may actually rise slower than the official inflation rate. If so, it will be due to choices made a year ago that turned out to be far more valuable than they appeared to be at the time…

Regards,

-Chuck

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Certainly you are not surprised that the key to curing inflation was to game the numbers?

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An interesting take and off the cuff has some merit. I can think of several other situations where the high and low is dismissed. Essentially looking at what is in the first and second standard deviation. Haven’t sen an article yet that has looked back to see what effect it would’ve had had it been in place in the past 20 years.

As always, my stand is that inflation is very personal and highly depends on what you do and how you live.

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Even if inflation is ‘highly personal’ that just highlights the inequities inherent in our increasingly unequal economy. As retired 5 percenters we can control our inflation to a much greater degree than bottom 50 percent families who have to buy gas to get to and from work, school, daycare, groceries , etc. They have to juggle housing, food, health, electric and clothing bills for themselves and their children. I can, and have reduced my meat bill to about $6.00 per week. My daughters, especially the eldest with two teenage boys, struggle to keep their meat bills under $200 per week. Yes, inflation is personal. But it is also increasingly inequitable. Young families and poor people of all stripes have little or no control over their ‘personal inflation’.

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I doubt the merit, quite a bit. Looks like nonsense.

If a cost/price is in the basket of costs that are deemed relevant (such as any costs that is normally incurred), for any population, be it a single person, a region, or entire country, it should not, in general, be excluded - certainly not for monetary policy of an entire country.

Sure, one might exclude high and low estimates from a collection of observations that measure the same thing, such as a group of economists’ forecasts of GDP (each economist is attempting to measure/forecast future GDP, maybe exclude the min and max values). A statistic like the median behaves this way.

But that is different from excluding inflation measures of different things, such as price of gas and food, just because the values happen to be extreme in a given sample such as a month of price measurements.

Observations on different items (food, gas, housing) in a basket are not the same statistical concept as different observations on the same item (economists’ various estimates of next quarter’s gdp)

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We are talking about averages over longer periods of time, but reflective in short periods of time. I agree with the word bogus and your application, but it is so much more and so much less because these are averages. There is at least one other paradigm that lost causes in an economic sense are washed away. Some of the winning components lose later and the averages won’t tell the story.

Warsh is playing a political game he will be made fun of later. The oil shock will come into focus in less than three weeks. I am still buying a few odds and ends.

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I will also quarrel with the idea that the U.S. tariff regime is a one-off expense. Two observations: first, businesses have clearly addressed this in a rolling manner as they burn off stockpiles of materials and later restock under new and higher tariffs. So the price increases have hit over many months. As you rightly argue, prices are not later reduced when tariffs decline. That’s perhaps due to the fact that few believe that a decline is permanent. Second, the capricious and spasmodic approach to tariffs in the U.S. has made it difficult for businesses to predict their costs and has also added complexity to economic forecasters.

It seems to me that, if Warsh’s desire to strip out every volatile contributor to inflation prevails, the Fed’s response to actual changes in prices will be less and less based in reality and more fantastical. This is the favored approach in the White House these days for nearly every policy of consequence, so he fits well within it. It bodes ill for the future of the U.S.

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We are aimed at failure and default with the current policies.

We will need some inflationary policies considering the unemployment wave that MAY hit us with the oil shock. The 1970s and 1946 echo resource allocation problems. If unemployment spikes deflation will happen.

The US does not have economies of scale. Without which we do not have competitive industries and markets. Tax rates are not incentivizing enough reinvestment.

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Remember when “if we just stop testing for COVID…”? I’m waiting for “if we stop measuring inflation…”

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