Miran: Neutral rate is falling, and Fed needs to accommodate it

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By Howard Schneider

(Reuters) -Changes in immigration, tax and regulatory policies are set to drive down underlying interest rates in the U.S., and make current monetary policy far too restrictive for what the economy needs to keep inflation at the Fed’s 2% target, Federal Reserve Governor Stephen Miran said on Monday.

“The upshot is that monetary policy is well into restrictive territory. Leaving short-term interest rates roughly two percentage points too tight risks unnecessary layoffs and higher unemployment,” Miran said in remarks prepared for delivery at the Economic Club of New York.

Miran last week dissented when the Fed cut the benchmark rate by a quarter of a percentage point, saying that a half-point cut was warranted. He also penciled in half-point cuts at the Fed’s next two meetings, a projection that he acknowledged “diverges from those of other FOMC members.” 

Miran is on leave as the chair of President Donald Trump’s Council of Economic Advisers, and his steep rate-cut view led immediately to questions about whether he was simply bringing Trump’s demand for rate reductions into the Fed’s deliberations.

But Miran argued that his colleagues, in judging the right setting for monetary policy, failed to account for how policy changes under Trump, including tariffs, tightened immigration, and deregulation, were pushing down the so-called “neutral” rate of interest. 

Though unobservable and hard to estimate, the neutral rate of interest is the level that neither encourages spending and investment, nor restricts economic activity to ease price pressures.

Miran said he thought the current policy setting, with a benchmark rate in the range of 4% to 4.25%, was far more restrictive than needed given his sense that the neutral rate is in decline. He felt rates should end the year in a range from 2.75% to 3%.

“In my view, insufficiently accounting for the strong downward pressure on the neutral rate resulting from changes in border and fiscal policies is leading some to believe policy is less restrictive than it actually is,” Miran said.

Other Fed officials are concerned that the neutral rate may actually be higher than suspected, leaving policy less restrictive – a situation in which the steep rate cuts Miran advocates could trigger inflation.

Miran said some of the Trump administration’s policy changes were also directly lowering inflation, with tightened immigration taking pressure off of the housing market. 

“I believe forecasters have underappreciated the significant impact of immigration policy on rent inflation,” Miran said. 

On the other hand, he said he felt the impact of tariffs on goods prices “have led to what I view as unreasonable levels of concern” about rising prices.

Inflation is currently nearly a percentage point above the Fed’s target.

At the median, Fed officials last week projected two more quarter-point rate cuts would be appropriate this year, with the policy rate ending 2025 about three quarters of a percentage point higher than Miran suggests.

(Reporting by Howard Schneider; Editing by Andrea Ricci)