Kevin Warsh, the newly appointed Federal Reserve chair, is pushing for a change in how the Fed measures inflation—and if you're wondering why that matters, here's the bottom line: it could pave the way for interest rate cuts much sooner than expected.
Warsh wants the Fed to judge inflation using something called Trimmed Mean PCE instead of the current standard, Core PCE. The difference? Trimmed Mean PCE strips out the most extreme price changes (both up and down) each month before calculating the average, while Core PCE just excludes food and energy.
That distinction matters because right now, Trimmed Mean PCE sits at about 2.36% while Core PCE is at 3.20%. According to analysis from Brookings, switching metrics would make inflation look much closer to the Fed's 2% target, giving the central bank more justification to cut rates.
Warsh argues that Trimmed Mean PCE is a better gauge of underlying inflation because it filters out statistical noise. When one or two categories spike dramatically in a given month—like used cars did during the pandemic—they can skew the headline number without reflecting broader price pressures. Trimming the extremes theoretically gives you a cleaner read on what's actually happening across the economy.
So what's the catch?
Critics say this looks suspiciously like moving the goalposts. The Fed has been using Core PCE as its preferred inflation measure for decades. Changing the metric now—right when inflation has proven stickier than expected—invites accusations of gaming the system to justify a policy shift the market wants.
Some economists point out that Trimmed Mean PCE isn't always lower than Core PCE. During periods when inflation is more evenly distributed across categories, the two measures converge. The gap right now exists because a handful of categories (like shelter costs) are still running hot while others have cooled. Switching metrics when it happens to favor your policy preference is, at minimum, optically questionable.
There's also a practical concern: most investors, analysts, and businesses are calibrated to Core PCE. If the Fed suddenly pivots to a different metric, it creates confusion about what the central bank is actually targeting. Markets hate uncertainty, and this kind of mid-game rule change could backfire if it erodes credibility.
