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New Federal Reserve governor Stephen Miran laid out radical new thinking on US monetary policy last week, justifying rapid and deep interest rate cuts. To the relief of almost everyone, the recent Donald Trump appointee, who is on leave from chairing the White House’s Council of Economic Advisers, did not simply say he wanted lower interest rates because the US president told him so. He made an economic argument.
His view is a rejection of Jay Powell’s empirical approach to policymaking. The Fed chair always makes clear that interest rates are set “based on the incoming data, the evolving outlook and the balance of risks”. Miran prefers a more theoretical conviction-based approach. The transparency is admirable, but his strategy appears to be mostly just picking the juiciest cherries to put in his policy bowl, adding dustings of voodoo economics and arbitrary assumption, and coming up with a super-sweet new monetary policy framework.
He uses three broad arguments: inflation will fall, and that the neutral rate (R*) is lower and the output gap is higher than the central bank thinks. This is standard Taylor-rule thinking, and is summarised in the chart below.
From the current roughly 4 per cent US interest rate, he says persistently lower migration will lower rental inflation, reducing overall price pressures and allowing for lower interest rates. The big green category depicts what he suggests is a lower neutral rate, owing to the Trump administration’s migration policy and fiscal programme (tariffs and the One Big Beautiful Bill Act). Looser regulation raises the output gap by boosting potential output.
All the numbers are taken directly from Miran’s speech, using midpoints where ranges were given. Empirical estimates are taken from economic literature.
The chart shows the benefits of this sort of conviction economics. Within a standard monetary policy framework, it is immediately transparent what Miran thinks. And that is better than decoding a ream of speeches and articles.