On Sunday morning, Senator Thom Tillis announced he would end his blockade of Fed Chair nominee Kevin Warsh after the Justice Department dropped its investigation into current Fed Chair Jerome Powell over cost overruns on Federal Reserve building renovations. With Republicans holding a 53-47 Senate majority, Warsh appears likely to be confirmed as the next Fed Chair when Powell's term expires on May 15th.
Last Tuesday, during his confirmation hearing before the Senate Banking Committee, Warsh fielded questions about the Federal Reserve's independence. He affirmed his commitment to preserving that independence and stated that President Trump had never asked him to commit to cutting interest rates, despite the President's public calls for lower rates.
Notably, Warsh expressed a preference for changing how the Federal Reserve tracks inflation, favoring what are known as "trimmed mean" measures, which filter out extreme price movements. The Dallas Fed currently puts the trimmed mean PCE at 2.3%, compared to the overall PCE rate of 2.8%. The trimmed mean is calculated by sorting price changes across PCE categories and dropping the 24th percentile and top the 31th percentile, then taking a weighted average of the remaining categories. By relying on this lower reading of inflation, Warsh may have more justification for cutting interest rates.
Sources: Bloomberg, Federal Reserve, Federal Reserve Bank of Dallas
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