By Howard Schneider
WASHINGTON (Reuters) -New Federal Reserve Governor Stephen Miran’s call for big interest rate cuts is based on faith that President Donald Trump’s economic plans will quickly lower the rate of interest that would prevail in a healthy economy, something policymakers see as hard to estimate under the best conditions.
It is an outlook that in Miran’s view puts the economy at a pivotal point right now, with the Fed risking a fractured job market by leaving interest rates far above a “neutral” level he feels is falling to near zero.
“It is very clear…people don’t feel urgent,” Miran said on Fox Business of the Fed’s recent decision to cut interest rates a quarter of a percentage point while he dissented in favor of a half-point cut. His colleagues, he said “are still very scared of tariff inflation.”
Rather than worry about relatively small price changes in some imported goods due to tariffs, policymakers should focus on administration border and fiscal policies that will reduce the neutral rate, he said in a speech last week.
But it is a view also out of step with how other analysts and central bankers generally think about current policy and the neutral rate that neither stimulates nor restrains the economy, which they estimate at roughly a percentage point higher than Miran.
There is debate also about whether the neutral rate may be rising or falling due to changes in the economy and longer-term forces like demographics, and thus disagreement about whether current Fed policy is exerting a lot or only a little restraint on spending and investment.
If monetary policy were as out of line as Miran thinks, “why hasn’t inflation come down more sharply and quickly?” former St. Louis Fed President James Bullard said on CNBC last week.
Now dean of Purdue University’s business school, Bullard is under consideration for Fed chair and noted the risks of Trump’s assertion that aggressive rate cuts could simply be followed by rate hikes if inflation increases. At that point, “you have a whipsaw kind of policy. Then markets start to worry, they start to price in inflation risk…and that’s very hard to get rid of. It’s a careful game they have to play.”
Miran, on leave from his job as chair of Trump’s Council of Economic Advisers, isn’t shy about the wedge between his views and the Fed consensus, which he says he is happy to avoid through continued dissents as he argues his case.
He may find it hard to sway the debate. Longtime Fed analyst and J.P. Morgan economist Michael Feroli said he found “some of (Miran’s) arguments questionable, others incomplete, and almost none persuasive.”
In addition to brushing off concerns about Trump’s tariffs, Miran has said rent inflation would slow sharply as the president’s crackdown on immigrants reduces demand for shelter. But the math he used to support the argument may have overstated the impact, Reuters reported last week. Miran acknowledged he may have been ‘optimistic’ in his view but stood by his belief that forecasters have not fully appreciated the effect of immigration policy on rents.
MIRAN: NEUTRAL RATE IS DROPPING
Despite questions about his reasoning, Miran’s opening position does start a reckoning over Trump’s potential to shape a Fed more aligned with his views, including rate cuts even deeper than Miran advocates. Trump is trying to force out Governor Lisa Cook and plans to replace Fed Chair Jerome Powell when Powell’s term expires in May.
Despite calling for half-point cuts, Miran’s first speech did include a wide path for rates hinging on whether Trump’s immigration, trade, tax and regulatory policies have the impact he expects, at the near-term pace Miran anticipates, in lowering the neutral rate.
Abstract and hard to pin down, estimates of neutral are fundamental to monetary policy thinking, representing the line between rates that hold the economy back and lower inflation, and rates that encourage economic activity, boost jobs and raise price pressures.
Miran argues it is dropping, and that other estimates are so bound to historical data the Fed doesn’t see it.
With a neutral rate at or close to zero, adjusting for the Fed’s 2% inflation target implies a Fed rate of between 2.00% and 2.50%, a roughly two-point gap with today’s 4.00%-4.25% policy rate range. Miran feels the Fed should cut to neutral quickly, in half-point steps, since he sees inflation returning to the Fed’s 2% target with little risk of tariffs driving it higher.
It is an all-in bet other policymakers see as risky.
Powell in particular is reluctant to put much policy weight on estimates of the neutral rate, and says it is best to gauge the stance of policy by what’s happening in the economy – a nod to data over models and forecasts.
Inflation remains around one point above the Fed’s target, and the 4.3% jobless rate is close to estimates of full employment, numbers that have kept Miran’s colleagues hesitant to cut in more than the typical quarter-point increments. Trump’s announcement of new, steep tariffs on household furnishings also shows the broader policy environment remains unpredictable.
RESEARCHER CITED BY MIRAN SEES RISKS NEUTRAL RATE WILL RISE
A new paper by an academic Miran cited in his speech shows the tricky terrain he is navigating by banking on a large drop in the neutral rate.
The research by Lukasz Rachel, a University College London assistant economics professor whose earlier work Miran cited last week in saying that tariff revenue will lower the neutral rate, concludes that emerging trends like deglobalization and the capital demands of artificial intelligence could drive developed-world neutral rates steadily higher – with a “sharp turnaround” possible if several of the potential risks develop at once.
Miran’s own calculations show that depending on how Trump’s policies play out, the Fed’s appropriate policy rate could fall as low as 1.69% – effectively negative once adjusted for the 2% inflation target and more in line with policies for beating back recession – or remain as high as 2.76%, closer to the 3.12% market participants see as a likely Fed stopping point.
Miran acknowledged some of the issues with his approach, saying in his speech he was “not attempting to provide an impossible degree of precision.”
But he also wants deep cuts now, the reverse of the caution his colleagues have taken towards Trump’s fast-moving overhaul of trade and other policies.
“If I’m right about those things then it is really important for monetary policy to exit the stance it is in because the longer it stays in that stance the more risk to the economy,” he said.
(Reporting by Howard Schneider; Editing by Dan Burns and Andrea Ricci)
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