For the better part of fifteen years, investors have read the Fed's intentions through one number: Core PCE. It became the formal benchmark for the 2% inflation target in 2012, and ever since, the entire infrastructure of market-watching (rates, equities, dollar, credit) has been built around what that number is doing and how the Fed is reacting to it.
That habit just got complicated.
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Kevin Warsh was confirmed as Fed Chair on May 13 and took the oath of office on May 22. One of his earliest publicly stated preferences (and an unusually loud one for a sitting Chair) is that Core PCE may not be the right read on inflation anymore. He prefers two alternative measures: Trimmed Mean PCE and Median PCE.
It sounds like an academic distinction. In practice, though, it very much isn't.
Three indices, one question
All three of these measures are trying to answer the same question: how broad is the inflation we're really seeing? Are prices rising across the economy, or are a small number of volatile categories doing most of the work?
They just disagree on how to define "volatile."
Core PCE, the incumbent, strips out food and energy (categories notorious for swinging on weather and supply shocks) and treats everything else as fair game. It is the most reactive of the three. The April 2026 reading came in at 3.3% year-over-year... more than a full percentage point above the Fed's target.
Trimmed Mean PCE, calculated by the Dallas Fed, takes a different approach. Rather than pre-deciding which categories are too volatile to count, it cuts whatever happens to be moving most in any given month: the bottom 24% and top 31% of price changes (by weight) get trimmed away. What's left is the mean of the middle. April 2026: 2.3%, which is notably closer to target.
Median PCE (Cleveland Fed) goes further still. It ignores the distribution and picks the single category sitting exactly in the middle. Whatever that one item is doing in a given month becomes the inflation reading. April 2026: 2.8%.
Same economy, three different numbers... and a spread of roughly a full percentage point between the highest and lowest. The Fed's "distance from target" can swing from 30 basis points to more than a full percentage point depending purely on which methodology ends up holding the gavel.
Why the measuring stick matters
Warsh has suggested publicly that Trimmed Mean and Median PCE approaching 2% would constitute sufficient evidence for rate cuts, even if Core PCE remains elevated. The logic, in our reading: if Core PCE is being held up by a small handful of concentrated categories rather than broad-based price pressure, the trimmed and median measures are giving the more honest read on what is actually happening across the economy.
It's a reasonable case... but it’s also only one vote of twelve on the FOMC, which limits how unilaterally Warsh can act on it.
But the underlying question matters far beyond any single rate decision. For the past decade-plus, the Fed's reaction function has been legible because the input variable was stable. Watch Core PCE alongside employment data, infer policy. If the input variable changes (and behaves differently), every read built on the old assumption gets reset, and that is not a small detail.
How the indices route through markets
Choosing an inflation index doesn’t just change policy but also has an impact on the real yields of bonds. Consistent increases in Core PCE inflation have historically led to markets pricing bonds at higher rates for longer, raising real yields. When Trimmed Average PCE is trending high, real yields tend to increase because the index reflects the broadening price pressure rather than noise from volatile outliers. Median PCE has tended to affect the long end of the curve (10Y-30Y) when it trends above 2%, signaling that the market is facing structural inflation.
Each index also affects the yield curve. Higher Core PCE has historically been associated with the yield curve flattening or inverting the 2Y-5Y sector. Positive trending Trimmed Average PCE leads to a bearish plateau without a sharp inversion. When Median PCE consistently increases, the curve can steepen at the long end. With all three measures currently above 2%, the Fed is in no position to cut rates in the short-term. With these changes, though, understanding which sectors of the curve exposure are most sensitive to which index is crucial.
The case for not running yesterday's playbook
At City Different Investments, this kind of regime shift is the case for active management in compressed form.
Passive exposure (in any asset class) rests on the assumption that the rules of the game stay the same. Read the cues the Fed has telegraphed for fifteen years and position accordingly. That logic breaks the moment the input variable changes, because the entire mapping from "what the Fed is doing" to "what assets are about to do" stops translating the way investors have learned to translate it.
Active managers can read across all three measures and adjust positioning as the FOMC's actual emphasis shifts from one to another. In our opinion, passive vehicles, by design, can’t react as quickly.
To be clear, we don’t know which measure Warsh will succeed in elevating, or which way the curve and equity multiples will move six months from now. But what we do know is that the inputs to the Fed's decision-making are in flux... and that portfolios built around the assumption of a stable reaction function may face some unfamiliar terrain sooner rather than later.
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