In a significant move to influence borrowing costs in the United States, President Trump has appointed Stephen Miran to the Federal Reserve's Board of Governors. In his inaugural speech, Miran articulated a vision for interest rates to be reduced to approximately 2.5 percent, which he believes is about two percentage points lower than current levels. Miran cautioned that maintaining elevated interest rates could jeopardize the labor market, which is already exhibiting signs of cooling.
“Leaving short-term interest rates roughly two percentage points too tight risks unnecessary layoffs and higher unemployment,” Miran stated, underlining the potential risks of high borrowing costs. His remarks came shortly after voting against the Fed's recent decision to lower rates by a quarter point. Miran, who was sworn in just before the Fed meeting, expressed his desire for a more substantial half-point cut instead.
In his address, Miran emphasized the importance of understanding ‘R-star’, a term used by economists to denote the equilibrium interest rate that neither stimulates nor slows down economic growth. He argued that recent immigration restrictions and increased savings due to tariffs, alongside significant tax cuts, have led to a notable decline in the estimated R-star.
Miran also predicted a slowdown in housing-related inflation, a crucial element driving overall price pressures. While admitting that his outlook was optimistic, he asserted that “forecasters have underappreciated the significant impact of immigration policy on rent inflation — both on the way up and, now, on the way down.” He warned against the risks associated with slowly adjusting the neutral rate, suggesting that this could lead to significant policy mistakes.
During a moderated discussion following his speech, Miran countered claims that his push for rate cuts signifies panic. “I’m not panicky,” he clarified, insisting that a cut of 0.75 percentage points or more would convey such a message. His stance diverges from many of his fellow Fed officials, who believe that the neutral rate has increased since the pandemic due to disruptions in supply chains and ongoing inflationary pressures.
According to the latest Federal Reserve projections, most officials estimate the neutral rate to be around 3 percent in the long run. Consequently, many policymakers do not foresee significant reductions in interest rates in the near future. Current forecasts indicate that a half-point decrease by year-end could bring borrowing costs down to a range of 3.5 to 3.75 percent, with minimal further reductions anticipated in 2026.
Despite the general Fed outlook, Miran has expressed a lower forecast, suggesting interest rates could decline to between 2.75 and 3 percent this year. This indicates a potential for substantial cuts during the remaining meetings in October and December. Miran remains committed to reducing inflation but acknowledges that raising the target beyond 2 percent could give the impression of the Fed shifting its goals.
Since the onset of the pandemic, inflation rates have consistently exceeded the 2 percent threshold. Miran also challenged the notion that the Fed’s role encompasses managing longer-term market-based interest rates, asserting that this is not a primary objective for the central bank.
President Trump has been vocal in his calls for the Fed to lower borrowing costs, emphasizing the need to make interest payments on the national debt more manageable. In contrast to Miran’s views, other Fed officials have shown heightened concern over the inflation outlook and have expressed less worry regarding the labor market's health.
The uncertainty surrounding the recent slowdown in job growth raises questions about whether it is due to reduced demand for labor or a decline in worker supply linked to Trump’s immigration policies. On Monday, several Fed officials, including Beth Hammack from the Cleveland Fed, cautioned against hastily cutting interest rates, warning it could lead to economic overheating.
Furthermore, Miran reaffirmed his commitment to the Fed's independence, which has been under scrutiny due to Trump's ongoing pressure for policy changes. His decision to take a temporary leave from his role as Trump's top economic advisor while serving at the Fed has raised questions about potential conflicts of interest. Although Miran's term is set for four months, he can remain until a successor is appointed by the president.
When questioned about responding to presidential directives regarding policy actions, Miran stated he would consider Trump's perspectives but would ultimately base his decisions on his own economic analyses.
