MNI: Miran Argues Fed Rates Too Restrictive By 200 BPS

The Federal Reserve has kept its benchmark overnight rate too high by roughly 2 percentage points, bringing significant risk to its employment mandate, Fed Governor Stephen Miran said Monday after arguing for three straight 50 bp rate cuts to end the year at last week's FOMC meeting. 

"Monetary policy is well into restrictive territory. Leaving short-term interest rates roughly 2 percentage points too tight risks unnecessary layoffs and higher unemployment," he said in remarks prepared for a Economic Club of New York event. 

The Fed's mistake has been insufficiently accounting for the strong downward pressure on the neutral rate resulting from changes
in border and fiscal policies, Miran said.

Reduced population growth as well as President Donald Trump's trade and tax policies reduce the real neutral rate, which Miran estimates to be around either a "model-implied" zero or "market-implied" 1%. 

SANGUINE ON INFLATION

Meanwhile, inflation is set to fall and the output gap close as Trump's "net zero immigration" policy lower rent inflation by 1 point per year, and deregulatory and energy policies put downward pressure on the output gap over the next couple years. (See: MNI INTERVIEW: US Growth, Jobs Poised For Rebound - Miran)

Roughly 2 million illegal immigrants may have exited the country by year-end, reducing annual population growth from 1% to 0.4%, equating to a nearly 0.4 pp drop in the neutral fed funds rate, he said.

Tariff revenue could reduce the federal budget deficit by over USD380 billion per year over the coming decade, according to Congressional Budget Office estimates. This 1.3% of GDP change in national saving reduces the neutral rate by half a percentage
point, Miran said. Loans and loan guarantees pledged by East Asian countries in exchange for relatively low tariff ceilings would further reduce neutral rates by two-tenths of a percentage point, he said. 

Economic growth induced by tax policy, estimated by the White House at USD3.8 trillion over the next decade, implies another half a percentage point reduction in r-star, which is partly offset by higher investment that increases r-star by three-tenths and deregulation that lifts r-star by another 0.1pp or 0.2pp, Miran said. 

TAYLOR RULE

The inflation and output gap components of the Taylor rule are also falling, Miran said. 

New rents are rising at around 1% annualized, much slower than the current all-rents measure, he said. As people move and renew leases, CPI rent inflation is set to decline to below 1.5% in 2027 from its current level of roughly 3.5%, subtracting 0.3pp from headline PCE inflation and 0.4pp by early 2028, he said. 

"Forecasters have underappreciated the significant impact of immigration policy on rent inflation — both on the way up and, now, on the way down," he said. "Given that roughly 100 million Americans rent, net zero immigration going forward would imply 1 point lower rent inflation per year." 

The removal of regulatory barriers will increase potential output, shrinking the output gap by 0.2pp to 0.6pp over the next couple years and translating to a policy rate that's 0.1pp to 0.3pp lower under a standard Taylor rule, Miran said. 

"Using these weights results in an appropriate fed funds rate of approximately 2% under the balanced approach and 2.5% under the standard rule."