As Jerome Powell's era draws to a close, the US Federal Reserve is undergoing a radical doctrinal shift. In his final meeting, Powell closed the door on interest rate cuts, citing energy prices and the Middle East crisis as reasons for core inflation (Core PCE) hovering around 3.5%. He even complained about pressures on the Fed's independence, effectively bidding farewell with a bitter pill. However, a completely different game plan lies on the table for Trump administration Treasury Secretary Scott Bessent and the new Fed Chairman Kevin Warsh.
During his Senate confirmation hearing, Kevin Warsh made a crucial move that markets overlooked. He described the Core PCE data, which markets have used as a primary compass for years, as noise. Instead, he stated he would prefer to use the Dallas Fed's "trimmed-mean" and median inflation data, which provide a more balanced measure of price fluctuations. The economy and prices remain the same, but the rules are changing.
https://www.clevelandfed.org/indicators-and-data/median-pce-inflation
And now, the Dallas Trimmed-mean PCE data will enter our lives. https://fred.stlouisfed.org/series/PCETRIM12M159SFRBDAL#
While core inflation is alarming at around 3.5 percent, the trimmed average, as indicated by Warsh, is at 2.4 percent, quite close to the Fed's 2 percent target rule. This metric change opens a clear path to legitimize interest rate cuts despite the high inflation figures in the headlines. The rules of the game are being rewritten by the actors around the table.
Trimmed-mean PCE inflation is an alternative measure of core inflation calculated by the Dallas Fed. This method is based on the monthly price changes of approximately 177 components within the Personal Consumption Expenditures (PCE) Price Index and aims to achieve a more stable inflation trend by trimming the most extreme (lowest and highest) price movements according to their weights. Unlike the standard “core PCE” measure, which excludes food and energy, it dynamically extracts the most extreme values each month based on the distribution of price changes, rather than excluding components permanently.
The new administration's strategy is not just a trick of the indicator. Shaped around Warsh, Treasury Secretary Bessent, and Stanley Druckenmiller, this new structure completely abandons the old Keynesian demand management model. Instead, it is shifting to a new system based on productivity and supply-side growth. The new system argues that artificial intelligence (AI) will create structural downward pressure on prices. In this scenario, interest rate cuts will not be to stimulate consumer demand in the market, but to facilitate the financing of energy, infrastructure, and technology. Thus, the Fed will be able to continue shrinking its balance sheet while simultaneously lowering interest rates. This situation, which contradicts the rules of the past, forms the basis of a new generation of supply and investment vision.
Although Warsh stated that he would not take direct instructions from President Trump, we will see much tighter coordination between the Fed and the Treasury in the new era. This will reduce the institution's political isolation, but may cause markets to question the Fed's credibility in fighting inflation. If the plan on the table is successfully implemented, structural unemployment and artificial intelligence integration will balance inflation while interest rates are lowered. This is why the real focus should be on 30-year US Treasury yields, not short-term interest rates. If short-term interest rates are falling in anticipation of a rate cut, while 30-year Treasury yields are being pressured upwards, it means the market is pricing in the cost of this new monetary policy. We are no longer facing just a change of personnel, but a massive regime change that will determine the direction of capital.
