Fed Chair Warsh’s preferred inflation measure is cooling. A big pinch of salt is advised

Dallas Fed trimmed-mean inflation slowed to 2.3% in April from 2.4% in March, but the article argues this measure is understating underlying price pressures because tariff-driven goods inflation has reversed its usual skew. Core PCE rose 3.3% year over year in April, the fastest since 2023 and moving in the wrong direction, reinforcing a more hawkish policy backdrop. The piece highlights disagreement over the best inflation signal, with implications for Federal Reserve rate expectations and broad market pricing.

Analysis

The market is treating the inflation debate as a single number problem, but the real issue is signal integrity. If tariff pass-through is contaminating trimmed-means, then the policy-relevant question is not whether inflation is "cooling" but whether the Fed is being forced to look through a temporary goods shock while services inflation stays sticky. That is a classic setup for a delayed reaction function: rates may stay restrictive longer than growth assets currently discount, but the next move could still be a cut once the data mix rolls over.

Second-order winners are firms with pricing power and low import exposure, while the losers are downstream goods retailers and discretionary manufacturers that cannot fully reprice fast enough. A tariff-driven goods impulse also compresses real household income with a lag, which can show up first in credit-sensitive spend buckets before it appears in headline unemployment. That means consumer cyclicals can look fine for another month or two even as forward indicators quietly deteriorate.

The contrarian point is that the consensus may be overfitting the wrong inflation filter in both directions. If policymakers anchor on the noisy trimmed mean, they risk holding too tight into a weakening growth backdrop; if investors anchor on core PCE alone, they may underprice the chance that tariff effects keep inflation sticky into year-end. The most tradable version of this view is a bearish belly-in-yield-curve stance: front-end rates should stay anchored by a patient Fed, but the intermediate sector is vulnerable if the market starts pricing a slower disinflation path rather than imminent hikes.

Key Decisions for Investors

• Fade aggressive rate-cut pricing: short IEF or put spreads on IEF over the next 1-3 months. Best if you expect inflation readings to stay sticky and the market to reprice the Fed toward 'higher for longer'; stop if core PCE reaccelerates for only one print and growth data softens sharply.
• Pair trade: long XLP / short XLY for 2-4 months. This captures margin resilience in staples versus the lagged demand hit to discretionary names if tariff-related inflation erodes real incomes; target a modest 5-8% relative move.
• Buy upside protection on consumer-discretionary retailers with heavy import exposure via KSS, GPS, or XRT puts into the next CPI/PCE cycle. The risk/reward is attractive because margin compression can hit before revenue deterioration is visible.
• If the market sells off on hawkish Fed messaging, consider accumulating TLT in tranches only after yields spike 15-20 bps. The contrarian thesis is that policy stays restrictive longer, but eventual growth slowdown can create a sharp duration rally over 3-6 months.