You can’t trim inflation

In 1 month, there will be a new FOMC meeting, this time presided by Kevin Warsh, the recently appointed Chairman of the Fed. He wil need to abide to the dual mandate of price stability and full employment, but he has mentioned his views differ on what the Fed has been doing for decades. His take, simplified: (1) the Fed’s balance sheet needs to be small out of crisis. (2) inflation is a choice (3) you can lower rates and decrease the balance sheet at the same time and inflation will not surge. He has also mentioned that he does not intend to use PCE as the preferred measure of inflation, (as the Fed has been doing for years now) but the 12 month trimmed mean PCE, which (surprise) is lower and less volatile. Now take a look at the charts below. The top one is the 10 year Treasury yield since 2022. You can see that it has broken the trend upwards, which is not good. And now take a look at the bottom one. The old fashioned CPI, the measure that matters to citizens as it’s supposed to measure the cost of living, is also picking up and depending on the new monthly readings, affected by oil and the Iran conflict, it can go up above 5% by November, where mid terms are held. People won’t vote on the trimmed mean PCE. People will vote according to what they read at the pump. Investors don’t use trimmed means to buy 10 year Treasuries, the calculate real yields using CPI ( among many other things). We have a social and economic problem. You can’t trim inflation.

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