Did Warsh and Vance just open the door to higher inflation?

MW Did Warsh and Vance just open the door to higher inflation?

By Brett Arends

The U.S. government's official 2% annual inflation target has suddenly been thrown into doubt by Kevin Warsh and J.D. Vance

New Fed Chair Kevin Warsh's internal reviews raise questions about future inflation.

The U.S. government's official 2% annual inflation target has suddenly been thrown into doubt by both Kevin Warsh, Donald Trump's new chair of the Federal Reserve, and J.D. Vance, his vice president.

The news - suggesting political pressure on the Fed to let inflation stay higher for longer - means added risks for investors in stocks as well as bonds, and also has ominous implications for the U.S. economy as a whole.

The Federal Reserve's official 2% inflation target may sound like a technical detail, but it's actually a cornerstone of the U.S. and global financial systems. It underpins everything from the bond market, to the stock market, to the mortgage market, to how your local supermarket plans price rises, to how your employer thinks about wages.

It may be no coincidence that financial markets tumbled after Warsh held his first press conference Wednesday afternoon.

All of which, incidentally, is yet another argument to prefer inflation-protected bonds over regular ones, although the latest news suggests longer-term versions of such bonds may also come under pressure. More on that in a moment.

Warsh, in his first press conference as Fed chair, explicitly reiterated his support for the official 2% inflation target - for now, anyway. But he left himself a lot of wiggle room.

It wasn't just that he retreated repeatedly to the vague phrase "price stability." It's that he also launched not one, but three internal reviews that could end up making changes to the Fed's inflation calculations and targets.

One is explicitly on "inflation frameworks."

The second is to review the data sources that the Fed uses, and how it uses them. That, too, will have enormous implications for inflation calculations. Warsh called it a "review of official statistics."

And the third is on U.S. productivity, including the benefits of AI, and how it will affect things like employment ... and inflation.

In response to a question, Warsh (reassuringly) said the 2% figure would be outside the scope of the inflation review. But then he added the dreaded words "for now."

And he admitted the Fed might revisit the 2% target once it had re-established some inflation credibility by bringing price increases - the current official rate is 4.2%, thanks to the war in Iran - back down to the 2% rate.

"I see no reason, until we have re-established our commitment and ability to deliver on the 2% inflation objective, to revisit that," he said of the 2% target.

He agreed that he was not too concerned with price-inflation targeting. What mattered was mostly the initial integer, or what was "to the left of the decimal point," rather than anything more exact. So: 2% plus something, or 3% plus something, or 4% plus something, and so on.

Probably the most ominous part of this, though, is the review of statistics. Most people don't realize it, but the calculation of inflation involves an enormous amount of assumptions and judgment calls, and it is open to dramatic reinterpretation. Or, a cynic might say, the real inflation figures are easily fudged.

It is notable that Warsh has already raised questions about the Fed's inflation calculations. Up until now, the Fed has relied mostly on one set of calculations - the personal-consumption expenditures, or PCE, price index.

But Warsh has praised something else called the "trimmed" PCE, which smudges the overall numbers by cutting out supposed outliers - massive one-off jumps and so on.

How much difference can this make? Tons.

According to the regular PCE, the official inflation rate right now is 3.8%.

According to the trimmed PCE: 2.35%.

In other words, Warsh's Fed could apparently slash the inflation rate in a moment if its internal reviews of statistics decide - hurrah! - that the trimmed PCE is a better measure of true inflation.

Just a day earlier, Vice President J.D. Vance also threw a cloud over the official 2% inflation target. Appearing for some reason on the televised New York coffee klatsch "The View," Vance said the administration wanted to bring the inflation rate down to "2.5%," a full half-point above the official target rate.

"So if you go back to the Biden administration, inflation got up to 9% under the Biden administration, OK," he said. "Right now, it's at 3.5%. By the way, too high - we're doing everything that we can to bring it back down to 2.5%, which is where most people would like to see it."

The White House could not be reached for comment.

Where does all this confusion leave investors, and especially retirees who depend on income from their investments? Nervous, I'd say.

We can cross our fingers and toes that this will come to nothing, or that the administration will back down from any attempts to meddle with the inflation statistics. Something similar happened last summer, when President Trump fired the person in charge of calculating the consumer-price index inflation data and tried to replace her with a favorable ideologue. Fortunately, the U.S. system of government actually worked: Behind the scenes, the controversial replacement was blocked.

We can hope the system will keep working.

Some in Washington have a very good reason to want to see inflation higher, especially if it doesn't fully show up in the official statistics. Inflation, which is effectively a stealth tax, is probably the easiest way to help square the circle caused by tax cuts, spending and deficits. Some years ago, the number crunchers at the University of Pennsylvania's Wharton School of Business estimated that raising the inflation target from 2% to 3% could effectively cut the effective value of the U.S. national debt by about 8% in a decade.

Changing the inflation statistics raises risks for all bonds and bondholders. That's because inflation whittles away at the real purchasing power of those future interest payments. The longer the bond, the more the risk. Inflation-protected Treasury bonds, known as TIPS, have more protection: The principal value (and, by extension, the coupon payments) change to reflect rising inflation. But even they could be in some jeopardy if the underlying inflation statistics are undermined.

These are nervous times for bond investors needing income. Owning shorter-term bonds, which entail less risk, is probably going to be the more sensible investment. It will surely be less scary.

-Brett Arends

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June 18, 2026 13:20 ET (17:20 GMT)

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