MNI INTERVIEW: Fed Will Look Through Inflation And Hold -Miran

Federal Reserve officials will likely look through a recent spike in inflation, viewing it as a temporary product of passing supply shocks, and refrain from raising interest rates this year, former Fed Governor Stephen Miran told MNI. 

“I still am inclined to think that they will do the right thing, which is to look through the temporarily higher inflation,” Miran said. 

He said investors worried about a string of rate hikes are too focused on the hawkish dots in the June Summary of Economic Projections, as well as pronouncements from more hawkish members of the committee, particularly in light of Chairman Kevin Warsh’s light-touch approach on communications. 

“The market is overkeyed to those dots, and I also think the inflation data are going to start coming in better over the remainder of the year,” Miran, now back at hedge fund Hudson Bay Capital, said in an interview. 

“What's happened is the chairman has decided not to provide any forward guidance whatsoever, which means that only the people who are willing to provide forward guidance are able to communicate that guidance to the markets.”

Miran, who stepped down from the Fed’s Board of Governors in May, said he would have submitted a June dot calling for two rate cuts because he believes that price pressures are actually subdued. 

Still, he concedes that “there are clearly people who want to hike,” adding that “they may end up cutting late this year if the inflation data come in well over the second half, but that would depend on the data. Certainly right now it seems a big hurdle.” (See MNI INTERVIEW: Fed Expected To Cut Rates Late In 2026- Ireland)

INFLATION MISMEASURMENT

A key element of Miran’s dovish view is his research on how the most widely used measures of inflation could be painting an overly hot picture that is not in keeping with reality, particularly with regards to portfolio management services and software prices. 

“The PCE is measuring quantities and labeling it as prices because the stock market was up and AUM was up. That's not an actual price increase. Trends in the asset management industry have been in deflation for decades,” he said. 

In software, he flagged a “composition bias" that overstates demand for software and accessories and extrapolates demand concentrated in AI to household spending more broadly. Miran noted the inversion of a longstanding trend of CPI being higher than PCE is indicative of some of those anomalies, which he thinks should forestall any policy reaction.

"A decision to pursue higher interest rates in order to compensate for measurement error to bring lower inflation elsewhere in the basket -- because the measurement error is an implicit reduction of the inflation target and it also effectively asks Americans to lose their jobs to offset statistical anomalies -- to me is a bit of a grotesque interpretation of the word stable prices," he said.

MONETARIST VIEW 

Miran has just co-authored Hidden PDF that tries to rekindle interest in monetary aggregates among central bankers, noting that Warsh has pushed back against the idea that money does not matter for monetary policy. 

“As I try to get a handle on how Chairman Warsh thinks, it became very clear to me that he's somebody who takes money supply seriously and monetarism seriously in a way that I think a lot of people at the Fed haven't in a long time,” he said.

His paper finds that rather than becoming less reliable over time, as Fed officials had concluded, monetary aggregates were simply not being measured adequately as the financial system evolved with the creation of savings vehicles like money market funds, which are money-like but not exactly cash instruments. 

New measures developed by other economists try to weight the money supply by how “money-like” different types of financial instruments are. “When you do that, the models regain their predictive power,” said Miran. 

Currently, those measures are showing monetary policy is close to neutral, the paper finds. “So the idea that it's somehow important to pull a Volcker when inflation is very likely going to normalize on its own accord is to me not the best policy.”