Warsh Favors "Trimmed Mean" Inflation Gauge, Bond Market Signals Risk
Taylor Wilson
New Fed Chair Warsh prefers an inflation measure that reads nearly a full percentage point lower than core PCE. The 30-year Treasury yield has breached 5% — the bond market is pricing in its skepticism.
What is 'trimmed mean' inflation, and why does it read lower?
Trimmed mean — stripping out the most extreme price movers and averaging only the middle — is the gauge Warsh endorsed at his Senate confirmation hearing.
The Dallas Fed's April reading: 2.35% annualized, a full 0.94 percentage points below core PCE. That gap is the widest in over four years.
This means → the same price data, measured with a different ruler, turns inflation from "still far from target" into "nearly there." Which ruler the Chair picks directly shapes the case for or against rate hikes.
What are critics worried about?
The trimmed-mean approach excludes the energy and import-price shocks triggered by the Iran conflict, which critics say ignores how aggressively firms are passing costs to consumers.
Wellington fixed-income manager Brij Khurana warned: if Warsh's focus is AI-driven productivity gains rather than near-term inflation risk, "that would be a worrying signal for the bond market."
In plain terms = bond investors aren't afraid of the AI story itself. They're afraid a new Chair might use a long-horizon narrative to sidestep the fact that inflation is not yet under control.
What is the bond market 'saying' right now?
The 30-year yield hit 5.014%, touching a post-GFC high last month. Higher yields mean buyers are demanding more compensation for risk.
TLT — the iShares 20+ Year Treasury ETF — has seen over $6 billion in net outflows this year, exceeding the $3.2 billion that left in all of 2025. It is down 0.8% year-to-date while U.S. equities are up 6.7%.
This reflects a vote of no confidence: long-bond holders are losing faith that the Fed can keep inflation in check.
What does the market want Warsh to do?
ING global rates strategist Padhraic Garvey said a clear signal from Warsh — leaning toward hiking or at least holding rates steady — would help "calm the long end."
JPMorgan portfolio manager Priya Misra urged the Fed to acknowledge that amid tariff, immigration, and energy supply shocks, "if the inflation facts change, they will change their stance."
This means → the bond market isn't demanding an immediate hike. It wants one sentence: if inflation gets away from us, we will act. That sentence alone could pull long-end yields back down.
Why is the 2021 lesson being raised again?
In 2021, the Fed similarly leaned toward downplaying inflation. TLT went on to post a −31% return in 2022 — the worst year in long-bond holders' memory.
Interest-rate swaps are already pricing in a probability of Fed rate hikes later this year and into next — some investors are betting on a "forced hike" scenario.
In plain terms = if the trimmed-mean gauge leads to a systematic underestimate of inflation, Warsh risks repeating the 2021 playbook. That is the bond market's single biggest concern right now.
Content is for reference only, not financial advice.