Every rate decision starts with one question. How fast are prices actually rising?
Kevin Warsh just told the Senate Banking Committee that the Fed has been answering that question the wrong way.
Warsh is President Trump's pick to lead the Fed. He used his confirmation hearing to push for new price tools.
He called the Fed's main price gauge, the PCE index, "a rough take" on what prices are really doing.
Here is the short version.
The PCE index tracks price moves across all the goods and services Americans buy. A few extreme items can drag the whole number around - a big jump in used cars, a spike in gas.
Warsh prefers what is called a "trimmed average." These gauges cut off the highest and lowest price moves.
They report only the middle ones. Think of it like a scoring system that drops the top and bottom judge and averages the rest.
The Dallas Fed and the Cleveland Fed already publish these. Warsh wants them closer to the core of how the Fed sets policy.
This is more than a stats argument. The gauge you pick matters.
Different price gauges tell different stories. Trimmed averages have recently run cooler than the headline PCE print.
Leaning on them could build the case for cutting rates sooner. That would mean cuts sooner than Powell has been willing to do.
Krishna Guha of Evercore ISI summed up the risk for investors.
"Shopping around on inflation when the generally used indicator is not behaving is risky," he said.
In plain English: is Warsh framing prices for a better read, or for cover to cut?
Fed leadership changes do not usually come with a new way to read the economy. Warsh is hinting that his might.
For bond buyers, the gauge shows up in yields. A yield is the interest rate a bond pays.
A Fed that leans on trimmed averages could justify cutting sooner. That would push short rates down and give long bonds a lift.
For stock buyers, the same move lowers the bar for stock prices. Every model that discounts future cash flows uses a rate, and a lower rate supports a higher price.
The risk is trust. The market has to believe the Fed is not picking numbers to match politics.
If that trust cracks, the price hopes that anchor markets can start to drift. A Fed that looks biased has a harder time doing its job, even if the data backs its call.
The Dallas and Cleveland Fed gauges are not new. They have been around for years.
Until now, they have lived on the edges of policy. Wall Street watches them, but the Fed has leaned on PCE as its main read.
Warsh wants to flip that order. He wants the trimmed read at the middle of the table, with PCE as a check on the side.
Hearings do not set policy. They do show how a future Fed Chair plans to think once the gavel is in hand.
Warsh just showed his hand.