For charts and active links go to discussion.fool.com - Control panel kevin warsh and inflation

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.

wsj.com - Kevin warsh wants the fed to think about inflation differently


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

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.

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.

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

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