"Tail-cutting mean" inflation index became a breakthrough for interest rate cuts? Bank of America warns: Powell's "selective use of data" could harm credibility.

President Trump's nominee for the next Chairman of the Federal Reserve, Kevin Wash, expressed his desire to change the way the central bank measures inflation in a confirmation hearing on Tuesday in the Senate. Wash stated that he is more inclined to use the "trimmed mean" inflation measure, as opposed to the traditional core personal consumption expenditure price index (PCE) used by the Federal Reserve. Wash stated, "What I care most about is, what is the potential inflation rate? We remove all tail risks, all one-time factors, and then assess whether general price changes are having second-order effects on the economy." Wash highlighted and praised the "trimmed mean" inflation measure, which is based on the personal consumption expenditure price index and involves regularly excluding the most extreme price fluctuations of the month's categories, in order to filter out temporary noise and reveal a more pure inflation trend. It is this algorithm that excludes outliers that has painted a different picture of prices in the past six months compared to public perception and traditional datathe trimmed mean inflation rate is only 2%, while the unadjusted PCE index remains high at 3.4% during the same period. The 1.4 percentage point gap between the trimmed mean inflation and PCE data sets provides Wash with potential policy flexibility. Analysts suggest that if the Federal Open Market Committee (FOMC) under his leadership shifts towards favoring trimmed mean inflation as a decision-making basis, then even if the traditional PCE remains high due to geopolitical conflicts and energy price disturbances, the door to rate cuts could still be pushed open through statistical loopholes. This means that the focus of the game on the future interest rate path will subtly shift from the absolute value of inflation to the contest for the "trend definition authority." While Wash did not explicitly mention easing during Tuesday's hearing, he has quietly revealed a statistical tool for redefining inflation. Once his nomination is confirmed, this preferred preference for trimmed mean inflation by the incoming Federal Reserve Chairman may allow him to justify rate cuts in the face of political demands from the White House. However, economists warn that this adjustment may make the Federal Reserve's monetary policy operations more complex. Bank of America economist Aditiya Bave points out that although the current trimmed mean index shows a low level of inflation, this strategy still carries risks. Bave warns that food and energy prices currently excluded from the core PCE index may still affect the reading of the trimmed mean index during periods of volatility. Historical data shows that in 2019 and 2020, trimmed mean inflation was higher than core PCE, which could have prompted the Federal Reserve to adopt a more hawkish policy stance. Bave states, "In order to maintain the credibility of the Fed and avoid the perception of selectively using data, Wash needs to stick to these indicators even when his preferred indicators of inflation are higher than core inflation." Wash's "impossible task": Controlling inflation while pleasing Trump More and more seasoned Wall Street macroeconomists believe that Wash faces an almost impossible taskcontrolling inflation while placating the Trump who nominated him. Wash believes that a key sign of success in Federal Reserve monetary policy is when no one talks about inflation anymore. However, to achieve this, the nominee for Federal Reserve Chairman is likely unable to please the president who appointed him in the short term. Just an hour before Wash attended the nomination hearing on Tuesday, Trump once again expressed his stance on interest rates. Trump was candid in an interviewif the new Federal Reserve Chairman does not immediately lower borrowing costs after taking office, he will be very disappointed. Subsequently, Wash underwent a two-hour interrogation in the Senate Banking Committee. Faced with a barrage of questions from lawmakers, Wash remained professional and firm. He staunchly defended the independence of the Federal Reserve, stating that Trump did not ask him to commit to any rate decisions, and stressed that even if the president did make such a request, he would not agree. Despite outlining a grand blueprintincluding policy framework transformation, in-depth research on data, and re-examination of the balance sheetWash is faced with harsh realities. Achieving his vision of "price stability" by the end of the year is akin to completing an "impossible task." Wash has adopted the view of former Federal Reserve Chairman Greenspan, who defined the core mission of "price stability" as when price fluctuations are so low that "no one talks about it anymore." In other words, true stability is achieved when price fluctuations no longer influence decisions by households or businesses. It was based on this logic that Greenspan set 2% as the inflation target. However, it may take several months for businesses and households to remain silent on price increases. The current situation is not optimistic: due to the impact of the oil crisis, overall inflation has soared to its highest level in nearly two years, exceeding the Federal Reserve's 2% target by over one percentage point. In fact, even before the escalation of tensions in Iran, the Federal Reserve's core inflation indicator was already above target. In the short term, few Americans will stop talking about or paying attention to inflation. The latest surveys from the University of Michigan show that consumer expectations for inflation in the next year surged to 4.8% this month, reaching a seven-month high. Additionally, the ISM survey also shows that input costs for businesses last month hit the highest level since the inflation spike in 2022. From various data points, the United States has yet to achieve the so-called "price stability." If achieving a situation where "no one talks about inflation" is the ultimate measure of success, then the Federal Reserve is far from victory. If Wash is ultimately confirmed to succeed Powell, his top priority upon taking office next month will be to address the complex economic landscape. He mentioned a series of reform ideas during the hearing, including reviewing loopholes in inflation data collection, focusing on the productivity wave driven by artificial intelligence, implementing forward-looking decisions, and gradually reducing the Federal Reserve's massive balance sheet to make room for future rate cuts. However, even if these measures ultimately provide a basis for rate cuts, starting the rate cut path at the beginning of his tenure, in the context of labor and business complaints about prices, seems untimely, and may even backfire. The market has already keenly observed this. Interest rate futures indicate that the likelihood of a rate cut by the Federal Reserve this year is less than 50%, with expectations for the next rate cut being pushed back to 12 months later. For investors who have bet on "the chairman nominated by Trump will surely comply with the White House," the prospect of a rate cut by the Federal Reserve is becoming dim. Wash's high focus on "balance sheet reduction" during the hearing further tightens policy expectations. Based on the current situation, Trump is highly likely to be disappointed, especially in this crucial midterm election year. Regarding potential political pressure, Wash's attitude is clear. He stated, "Inflation is a choice, and the Fed must take responsibility for it." He believes that the government has the right to express its opinion, but "the independence of the Fed largely depends on the Fed itself." However, not everyone is optimistic about this. Former Fed economist Claudia Sam criticized Wash's clichd remarks for ignoring reality. She pointed out that the pressure Trump has exerted on the Fed goes far beyond words. Fed chairs who dare to defy Trump's wishes not only need the courage to listen, but also need enough resources to withstand possible legal challenges.