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At his first press conference, newly appointed Fed Chair Kevin Warsh expressed support for the 2% inflation target but simultaneously launched multiple internal reviews, raising doubts in the market about the stability of this policy cornerstone.

According to MarketWatch analysis, Warsh not only repeatedly used the vague term "price stability," but also initiated three internal reviews, covering the inflation framework, official statistical data sources, and productivity assessment, which could open the door to intensified inflation.

Although he stated that the 2% target is "temporarily" not within the scope of the review, he immediately added that once the Fed re-establishes credibility on inflation, revisiting this target cannot be ruled out. This wording made investors' judgments on policy direction more complicated. Both U.S. stocks and U.S. bonds fell immediately after Warsh's first press conference.

For stock and bond investors, these developments imply an increase in risk premium. Uncertainty about inflation expectations will directly impact the real purchasing power of bonds and suppress stock valuations, while inflation-linked bonds (TIPS) may also face potential risks due to adjustments in statistical criteria.

Three Reviews, Hidden Signals

At his first press conference, Warsh announced the launch of three internal reviews: the first focuses on the "inflation framework" itself; the second scrutinizes the data sources and usage methods relied on by the Fed, which Warsh named "official statistical data review"; the third revolves around U.S. productivity, especially assessing the potential impact of AI on employment and inflation.

The three reviews are advancing simultaneously, a scale rarely seen in Fed history. In response to reporters, Warsh said the 2% target is "currently" not within the scope of the inflation framework review, but he immediately added that, once the Fed re-establishes its inflation commitment and execution capability, revisiting that target could not be ruled out.

Notably, Warsh also said his attention to the precise inflation number is relatively limited; he is more concerned with the “integer to the left of the decimal point” — i.e., whether the inflation rate falls in the 2%, 3%, or 4% range, rather than the more granular decimal places. This statement has been interpreted by some market participants as an implicit signal of greater tolerance for higher inflation.

Statistical Disputes: Huge Gaps Behind the Numbers

Among the three reviews, the statistical data review is considered the most far-reaching. Calculating inflation data involves a large number of assumptions and judgments; tiny adjustments in methodology can lead to significant differences.

Warsh has previously questioned the Fed's current inflation calculation method. The Fed mostly relies on the Personal Consumption Expenditures (PCE) price index to measure inflation. However, Warsh has publicly praised another metric called the "trimmed PCE," which smooths the overall data by excluding extreme outliers.

The difference between the two indicators is considerable. According to MarketWatch, using the conventional PCE, the current official inflation rate is 3.8%; whereas with the trimmed mean PCE, this figure is only 2.35%. In other words, if the Fed's internal review ultimately decides that trimmed mean PCE better reflects “real inflation,” the official inflation rate would drop significantly from a statistical perspective, without the need for actual tightening of monetary policy.

The current official U.S. inflation rate is 4.2%, partly due to the Iran war. Against this backdrop, the choice of statistical criteria has a substantive impact on policy direction.

Potential Direct Impact on U.S. Bond Markets

These developments have multi-dimensional effects on the market. The ambiguity of the inflation target, as well as the possible redefinition of statistical criteria, will have a direct impact on the bond market—since inflation erodes the real purchasing power of future interest payments, the longer the bond duration, the greater the risk.

Inflation-linked Treasuries (TIPS) are usually treated as tools to hedge inflation, with principal and coupon payments adjusted according to inflation data. However, if the official inflation statistical data itself is changed, the protective effect of TIPS will also be weakened.

From a more macro perspective, the U.S. government has ample reason to favor rising inflation. According to estimates from the Wharton School of the University of Pennsylvania, raising the inflation target from 2% to 3% would shrink the real value of U.S. national debt by about 8% over ten years. Amid tax cuts, spending expansion, and fiscal deficits, this mechanism has considerable appeal to some policymakers.

Where Warsh’s three reviews will ultimately lead is still undetermined. But for retirees and fixed income investors relying on investment returns, policy uncertainty itself has become a risk factor that cannot be ignored.

Risk Warning and DisclaimerThe market is risky; please invest cautiously. This article does not constitute personal investment advice and does not take into account any individual's specific investment objectives, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their specific circumstances. If you invest based on this, you do so at your own risk. ```