Fed Watch – 6/5/2026

The below transcript is a literal translation of the podcast audio that has been machine generated by Adobe Podcast.

Hi, I’m Lauren Saidel-Baker, and thank you so much for joining us for this June 5th edition of Fed Watch.

Well, the big news this week, the metric that I’m hearing more than anything else is Trimmed Mean PCE. I’m sure you’ve been hearing about this alternate view of core inflation as well. So today I wanted to take our full episode and just dive into various inflation measures. We’ve talked about some of them in the past, especially the difference between things like PCE, that is the Personal Consumption Expenditures versus the CPI, the Consumer Price Index. So I don’t want to belabor that point, if you need to go back and look at past episodes there. But today we’re talking about this new measure, it’s calculated by the Dallas Fed, and it’s getting a lot of attention ever since Warsh, in his confirmation hearings, noted that he preferred prefers trimmed average measures of inflation. So what exactly are we looking at here? How is it calculated and why does it matter for future Fed policy?

The first question what is it? Overall, a trimmed mean inflation metric is just trying to get at a different view of core inflation. And it’s calculated essentially by taking the outliers, taking the noise and removing them from our calculation. That’s done both on the high side and the low side. So this measure, that it’s the most popular measure, there are some others out there for trimmed means, but this one calculated by the Dallas Fed, essentially what they are doing is every month they’re taking all of the components of PCE, all 177 total individual categories, and they’re lining them up. In this month, what changed the most and what changed the least? From there, they want to chop off the tails.

So they do that, again for just this Fed calculation of the Dallas Fed, they take off 24% of the weight from the lower tail, and 31% of the weight for the upper tail, those are trimmed off. The reason for slightly different measures on the high and the low side is that the calculations show that, at least in recent history, the number of categories that tend to see falling prices, or very slowly rising prices, it just doesn’t quite equate to the same number of categories with steeply rising prices. So that’s why we have the 24% versus the 31%. Although I will say the way the math works out, at least for the April number that just got released, we saw 57 components each, again from that 177 total being chopped off on both the upside and the downside.

Now, if this is causing a little bit of confusion, I want to take a step back. You probably are already very familiar with a trimmed mean score. It’s just not in this context. So let’s put this in a very different context, one that most Americans are quite familiar with, Olympic figure skating. If you think back, I don’t think it’s the current system, but how these competitions used to be judged, there would be a panel of judges, each one would give a score, and then they would take off the high scores and the low scores and use just that middle group, that remaining group of judges scores, in order to calculate that skater’s final score, their final grade. So that is what we’re doing here, that’s all a mean trimmed inflation average is, we’re taking the Olympic figure skating judges. In normal times, the Dallas Fed has come out and said that they find this to be a much more accurate inflation measure.

They said this outperforms more conventional measures of core inflation. And if you think about it, by taking out the outliers both to the high side and the low side, that’s going to give us something a little bit more range bound, right? It’s usually going to be kind of a tighter range of inflation. We don’t have severe swings to the high and the low, some times that offset some times that don’t. The difference is in rising inflationary environments like we find ourselves in arguably at the moment. But a very good precedent is if you go back to the immediate pre-Covid, excuse me, post-Covid rise in inflation. So in 2022-2023 time frame, when costs were rising very quickly across a broad number of categories, this inflation score, it really lagged behind some of the others.

We’re going to show a chart, if you’re only listening on an audio only platform, we do also have a blog about this topic, we’re going to link to that in our show notes. So please see that in the description wherever you get this podcast. But for those of you that can see this chart, you’ll notice that over time the trimmed mean PCE, it’s a little bit more range bound. It’s a little bit less volatile let’s say, except you notice the big difference is in the immediate post-Covid inflation run up, when this measure really does lag behind things like the CPI, which we prefer here at ITR Economics, the overall PCE and even the core PCE. Again, this is meant to be a core measure of inflation. It’s meant to take out those more volatile categories.

Core inflation does that by excluding the same categories every time. They determine that food and energy are much more volatile, so every month will simply strip out the food and energy components. To take this back to our figure skating judges analogy, this is like if we, for example, always took out the French judges score because that one was for some reason determined to be more volatile. Whereas with the trimmed mean we’re taking out whatever the most volatile components are, and those change month to month, it’s not always the same categories. So right now, for example, some of the things being stripped out, oil, clearly with the conflict in the Middle East, what that’s doing to the run up in oil prices. Jewelry is another one. Some of these categories aren’t necessarily the headline things that we think about, there are, as I mentioned, 177 of them total. So you can get into the weeds. We do have a full view of exactly what is rising more rapidly, what is either deflationary or seeing prices rise more slowly.

But is this a good view of inflation? I think in this case the beauty is really in the eye of the beholder. So there is an argument to be made, especially during normal times, that this is going to keep some volatility out of those numbers. It’s going to just move a little bit more slowly. And again, the reason we’re even talking about this in the first place is that incoming Fed Chair Kevin Warsh has stated his preference for a measure like this one. So is this the new gold standard of the Fed? Does this replace core PCE as their gauge of inflation? I think we’re a little bit premature to say that. First of all, Warsh is only as we’ve said before, one vote on that voting committee.

Anything he does, whether it’s determining definitions of what inflation matters or doesn’t matter, he’s going to need to build consensus on the FOMC. That’s going to be a bumpy road under current   economic times, especially with the political dimension to the Fed that we see these days. But this seems like another metric to watch. Maybe this is just another gauge in the Fed’s toolkit and one that I think we’ll be hearing much more about. Hope this gives you a quick overview of exactly what we are talking about when you hear trimmed means. As always, we will be dissecting this and many other inflation metrics in the weeks and months to come. We hope you’ll stick with us right here on Fed Watch.