The Fed's coming redefinition of price stability

The Federal Reserve is approaching a corner it cannot argue its way out of. Headline CPI sits at 3.8 percent, well above the 2 percent PCE target the FOMC

formally adopted in January 2012. Treasury yields are rising as bond investors demand compensation for persistent inflation and widening deficits. Cutting rates into this would shred what remains of the Fed's inflation-fighting credibility. The Ledger Desk reads the emerging trial balloons — trimmed-mean measures, expanded Treasury purchases — as the outline of an escape hatch: redefine the target, then cap the curve.

The mechanism is already visible. Kevin Warsh, a former governor and a plausible next Chair, has floated a major data project to measure underlying inflation using trimmed-mean metrics — statistical constructs that discard the largest price movements at each tail. Trimmed-mean PCE typically prints lower and smoother than headline or core PCE

. That is not a neutral methodological upgrade. If the Fed adopts a measure that mechanically strips out the goods households actually feel — groceries, rent, utilities, healthcare — it manufactures the cover to ease policy while the lived cost of living continues to rise.

When the data doesn't cooperate, just change the data.

The 2 percent number was never sacred

The intellectual scaffolding for a redefinition is weaker than the institution's rhetoric suggests. As Barry Ritholtz has documented at The Big Picture, the 2 percent target traces to an offhand 1988 remark by New Zealand Finance Minister Roger Douglas, codified into a 0-2 percent band in the Reserve Bank Act of 1989, then adopted serially by Canada in 1991, the UK in 1992, the ECB in 1998, and only formalised by the Fed on January 25, 2012. It is, in Ritholtz's framing, an arbitrary historical artifact hardened into orthodoxy. That history cuts both ways: if the number was never derived from first principles, defenders of the target have a thin bench when the political cost of holding it rises.

The balance-sheet side of the trap is already binding. Pascal Hügli notes the Fed is again buying roughly 40 billion dollars of Treasuries a month because bank reserves hit critically low levels. Quoth the Raven's argument — echoed across the cluster — is that this is the front edge of something larger. If long-end yields keep rising against a fragile consumer and a Treasury refinancing wall, the operational answer is to cap them. Yield-curve control, once a Bank of Japan curiosity, becomes the domestic policy of last resort. Michael Green assigns a YES to explicit YCC; Quoth the Raven puts direct Treasury-market intervention within 24 months at YES; the same author places redefinition of the inflation metric on the same 24-month horizon, also YES. The dossier shows no dissent — every named forecaster in the cluster sits on the same side of these calls at moderate conviction. Treat this as a one-sided view, not a market consensus.

For the reader building positions, three resolution-ready questions fall out of this. First, does the FOMC or a Warsh-led Fed formally elevate trimmed-mean PCE — or a comparable underlying-inflation construct — in its communications within 24 months. Second, does the Fed announce explicit caps or soft targets on long-end Treasury yields in the same window. Third, does the pace of System Open Market Account Treasury purchases exceed the current 40 billion monthly run-rate before mid-2026. Warsh's own line — that the Fed 'should be humble and never naïve' — will be tested against whichever of these the institution reaches for first.