MNI: Transcript Of Interview With Fed Governor Miran

The following is a lightly-edited transcript of MNI’s exclusive interview Monday with Fed Board Governor Stephen Miran.  

MNI: How do you see the economy evolving this year in terms of the two sides of the Fed’s mandate and what do you see as the appropriate central bank response to that outlook? 

Miran: I see the economy having entered the year with decent momentum, and expect the economy to continue to perform reasonably well, in part because the Fed is moving to a more appropriate stance. That said, I think there's more work that we have to do in moving towards an appropriate stance. 

It's pretty clear to me that underlying inflation has already been running pretty close to our target. I gave a speech on the subject in mid-December where I argued that most of the excess inflation over target is due to statistical quirks of the measuring process that relate to the housing inflation that we experienced several years ago that's just taking a very, very long time to normalize in the data, even though market rents have been running at a 1% rate for a couple of years now, and average tenant rents have caught up to new tenant rents, and due to what I think what are pretty nonsensical constructions for measuring financial services in the PCE inflation data. Once you extract from both of these distortions, underlying inflation is running at around 2.3%, which is basically with the noise of our target. 

If you look at the CPI data that came out after the last FOMC meeting in December, they came in much lower than people were expecting. It is true that that was biased partly down with respect to some special factors around housing and the way BLS treated the government shutdown. So that's true, but I think nevertheless, it's important that we pay attention to biases on both sides when we think about where inflation is and where shelter inflation is. I think it would be cherry picking to want to look through the December inflation data because of that bias in the shelter inflation calculations, without also adjusting for the fact that catch up appears to be just about done, with average tenant rents catching up to new tenant rents, and that we therefore should expect that overall shelter inflation will come down quickly now.

MNI: Can you explain why the convergence process you described (between market rents and measured shelter inflation) makes you expect even faster disinflation, and why that doesn't signal that maybe the disinflation process is kind of nearing an end?

Miran: The way that the BLS constructs the shelter inflation data and CPI, which then feed into PCE inflation, is that they're focused on the rents paid by all tenants, which makes sense, because we want to capture costs borne by all people in society. Now, if people reset their leases only infrequently, because, you know, you reset your lease maybe once a year for most people, when you renew, or only when you move homes, or even move out, or to start starting a household, whatever it is – it will take time for for the average, basically, to catch up to where market rents are right now, because market rents are showing you the price for a new lease. Therefore, there's a long period of time that it takes for the measured inflation data to catch up to where the actual market is, because most people are only resetting their lease infrequently. 

Now, for some reason, mostly relating to sample restrictions, the CPI rents have actually taken longer to catch down then a measure called average tenant rents, which is drawn from the same micro data as the CPI rents, but imposes some different sample restrictions to deal with missing data and problems like that, and obviously incorrect reads and other sort of standard, standard data issues.

But because the average tenant rents appear finally to have caught up to new tenant rents, and because market rents have been running at a 1% rate for a couple of years, that gives me a lot of confidence that we're going to see CPI rents really start to decelerate in the near future. And this is something that's new, and that wasn't the case, say, 18 months ago, because average tenant rents have not caught up to new tenant rents. Market rents hadn't been showing a couple years worth of low inflation. There was not really a lot of confidence that the acceleration in measured CPI rents would really occur. And now I think we can have a lot of confidence, because these other two things have been going on for a while now. 

There was some concern that if market rents started picking up again, then you sort of extend the period that it takes for CPI rents to catch up to new rents. But that concern doesn't appear to be a reasonable concern right now, given what's going on in the labor market. So as a result of these things, I think it makes a lot of sense to expect a swifter deceleration in CPI rents, which again, also means PCE rents, because they flow through. And I'm not alone in this, I think Goldman has published on this a couple times the last couple months. I think a lot of other people have published on this as well. 

What I would like my colleagues to do is to recognize that this is in the pipeline and that what we look at when we look at measured PCE inflation is a bit of, you know, we're looking at a backward mirror, right? We're seeing data that were reflective of the housing situation in 2023, not data that are reflective of the housing situation now, let alone the housing situation in 2027 and because the monetary policy lags, really into making policy for 2027 not 2023. 

MNI: How are you looking at the employment side? We are gradually softening but we also have a growth backdrop that seems resilient and would suggest that the bottom is not going to fall out of employment. How do you reconcile those two?

Miran: I would say, I would say the labor market has been on a trajectory of gradual weakening, in large part because of Federal Reserve policy and with the unemployment rate having crept higher and with various survey measures showing a job market that increasingly favors employers, it seems clear where the where the trajectory is, and given the inflation outlook, it seems inappropriate for us to try and maintain the trajectory and push even farther.

The next thing I'd say is that there are some developments that would make you think that a temporary divergence between GDP and employment is not absolutely shocking. One of those is, what economists would call intensive margin incentives from the One Big Beautiful Bill Act. There were some provisions of OBBB like no tax on overtime or no tax on tips, that would incentivize individuals working more hours, more than an actual increase in the number of employees. And so, as a result, if it had an effect on labor supply, that is the type of thing that you would expect to see lead to both a loosening labor market, because you're increasing labor supply without necessarily demand at the same at the same amount, unless monetary policy accommodates it, but also a little bit of a divergence between between GDP growth and the labor market. 

Now, I don't think that that explains nearly all of the discrepancy, to be clear. But it's also clear that some technologies may have the effect of taking time for the labor market to adjust. And I'm not a technology doomer. I'm not one of these guys who thinks that technology eats all the jobs in the universe. I think that we've had new technologies for all of the last, whatever, 100,000 years, and humans always end up creating new professions. And it's just difficult to imagine ex ante what those professions are but we always end up doing so. But it is possible that some of the new technologies that are coming to bear, there's some labor adjustment, and so it's quite possible that there's some layoffs at first, some reduced employment at first, before new professions get created, and before companies figure out how to hire people to maximize the use of the new technologies. 

So the discrepancy, while not claiming to fully understand it yet, as I think most people don't, is probably some combination of intensive margin incentives, new technology leading to labor reallocation that we're sort of in the middle of, and finally, some statistical discrepancies that will likely get revised away in the future as we get additional updates. I'm not sure exactly how that looks, but I do think that there's a lot of measurement error in how we measure the economy, and there always has been, and there’s always revisions. And so in the fullness of time, it could be that we have additional insights into the problem. 

MNI: And do you expect the Fed to provide enough support for the economy and for the job market to prevent significant further deterioration in conditions there? 

Miran: I mean, I sure hope so. I think the economy needs it. And as I said before, I don't think we should be asking people to lose their jobs because of errors and how we measure inflation. And I think it seems very clear to me that we're picking up, that we're picking up the state of the housing market in 2023 not the state of the housing market now. 

MNI: So in terms of the policy response that the backdrop that you've outlined calls for, if we're interpreting your dot correctly, you lowered your 2026 dot to 2.125% which would require 150bps of cuts this year. What's your thinking about how much more easing we need and how far we are from neutral, and how are you making that case to your colleagues? 

Miran: I lowered my dot for this year for a couple of reasons. One is an increase in damage that we've seen from the government shutdown. Two is the fact that the unemployment data and the inflation data had both come in more dovish than I expected. And so, I do think that it's important to update one's views when one gets data, and we absolutely got new data in the interim. 

There's a third reason too, which is important, which is that my previous dot, you know, of course, was preconditioned upon the Fed pursuing the right policy. And as long as we keep policy at what I think of as materially too tight, we're reducing my growth expectations in the future. And that requires looser policy now to offset that. So part of the lower dot is because we've already failed to follow through on the easing that I thought was appropriate. 

MNI: Do you think markets could be underestimating the possibility that whoever gets appointed to Fed chair will likely be more sympathetic to your worldview than the current leadership, and therefore that the committee’s center of gravity could quickly shift toward your view, toward a more dovish stance? 

Miran: That's a lot of hypotheticals for me to address and I'm not sure that I want to try and address this hypothetical. What I will say is that I think people have been moving towards my views all year long on a variety of issues. Earlier in the year, right after ‘Liberation Day’, I was getting on TV and saying, you know, people are massively overreacting to this stuff. Imports are a little bit more than 10% of GDP, and there's just no possible way that a shock of this size on 10% of the economy can have the type of response that that people are calling for in terms of a massive recession. By the way, a lot of those calls lasted only a week before people realized how wrong they were. Or in the words of, you know, of some people, inflation spikes worse than we saw after Covid. That was something that a very serious economist actually predicted. 

So people have been moving my direction all year long. And everything that I said about inflation in that speech I believe, and I think that people will continue moving in my direction because I wouldn't be saying these things if I didn't think that they were true. 

MNI: How do you counter the view that the worst effects of the tariffs have yet to be felt?

Miran: I would refer folks to to my inflation speech from mid-December, in which I fully lay out that I actually don't need a decline in goods prices to hit my inflation. My inflation forecast is driven entirely by things that are not by things that are not core goods. So I can tolerate higher inflation from goods for a sustained period of time, in large part because I have such aggressive shelter disinflation marked in my forecast, because the housing market is plain for all to see. It is very plain to see where new rents are and where they have been for the last couple of years. And we absolutely know where measured inflation is going, because the market rents data that we've got for the last couple of years is a window into the future.  So you can have a very, very high degree of confidence on where measured shelter inflation is going over the next couple of years. And because of that confidence, it allows me to tolerate higher core goods inflation first the same period of time. 

So I actually don't need to forecast the decline in core goods inflation the way that many of my colleagues who do think that tariffs are driving material inflation there. I can tolerate it as higher for longer, because I'm willing to look at the market rents to inform my expectations of where shelter inflation goes. Indeed, one thing that I noted in the speech, is that if I end up being right about housing, and I'm not alone on this view on housing, by the way… but if I end up being right on housing and wrong on tariffs, and then goods inflation does come down as a result of tariffs, we're going to end up pretty substantially undershooting our target as a result of that. That's a risk that I feel is really being underappreciated by people. We seem to be having a lot of people that that are fighting the last war without sort of thinking about the fact that we have two sided risk looking forward. 

MNI: Does that mean policy would need to be accommodative, significantly below neutral if that’s the case? 

Miran: Well, if inflation ends up undershooting your target and unemployment is above where you think the natural rate of unemployment is, then that would call for a very stimulative monetary policy. To be clear, that's not my base expectation, because I don't think that I'm going to be wrong about tariffs. I think people have been moving in my direction on tariffs all year long, and I think people will continue moving in my direction on tariffs. If I had a different view on tariffs, I would change my view on tariffs, but I have not seen anything to do with me otherwise. So this is just an exercise of ‘what if I'm wrong’ type of thing.

MNI: One last question about your own plans. There is no nominee currently on the slate to replace you as Fed governor even though the term to which you were appointed officially expires at the end of the month.  Does that mean that you're staying for the foreseeable future?

Miran: Until somebody else is confirmed into my seat, I will continue to sit in my seat. That means what happens depends on whether somebody is nominated for my seat, and then what the timeline for that person's confirmation is, if someone is nominated for my seat. Whether I'll remain on the Federal Reserve if somebody is confirmed into my current seat will depend on a variety of those things, including how many seats are open, and whether the president nominates me for one of them, or wants to keep me in this seat. That's not up to me.