Federal Reserve Governor Stephen Miran has voiced concerns that current interest rates are excessively high, potentially jeopardizing the labor market. In a significant policy address at the Economic Club of New York on October 23, 2023, Miran argued for substantial rate reductions in the coming months to foster economic stability and prevent job losses.
Miran’s remarks come as he emphasizes that the neutral rate of interest—the level at which monetary policy neither stimulates nor constrains economic growth—has likely fallen below previous estimates. He attributed this shift to various factors, including tariffs, immigration restrictions, and tax policies, which together have contributed to a more restrictive economic environment.
“The upshot is that monetary policy is well into restrictive territory,” Miran stated. He warned that leaving short-term interest rates approximately 2 percentage points too high risks unnecessary layoffs and increased unemployment.
At the most recent Federal Open Market Committee meeting, the Fed set the target interest rate range to 4-4.25%. Miran, who recently joined the board, was the sole dissenter in favor of a more aggressive reduction of rates by half a percentage point. He expressed a desire for further cuts, advocating for an additional 1.25 percentage points at the remaining meetings this year.
Miran previously served as chairman of the White House Council of Economic Advisers and is currently on an unpaid leave from that position. His term as a governor is set to expire at the end of January 2024. He believes that various recent economic changes, particularly a sharp decline in immigration and the impact of new tax legislation, have exerted downward pressure on the neutral interest rate.
“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 commented. He asserted that while lifting regulations could potentially increase the neutral rate, current fiscal policies are significantly lowering it.
His estimate for the neutral interest rate is approximately 2.5%, notably lower than the median projection of 3% from other Federal Reserve officials. While several policymakers share the view that the neutral rate is under 3%, Miran stands out as the only one advocating for swift adjustments.
Concerns about inflation persist among his colleagues. Alberto Musalem, President of the St. Louis Fed, who supported the recent rate cut, cautioned about limited room for additional reductions unless specific conditions are met. “Should further signs of labor market weakness emerge, I would support additional reductions in the policy rate, provided the risk of above-target inflation persistence has not increased,” he explained.
Meanwhile, Raphael Bostic, President of the Atlanta Fed, expressed hesitance regarding further cuts. In a recent interview with The Wall Street Journal, he highlighted ongoing inflation concerns, stating, “I am concerned about the inflation that has been too high for a long time.” Bostic noted that his current position does not favor another rate cut ahead of the upcoming Federal Reserve meeting scheduled for October 28-29, 2023 in Washington.
As discussions about monetary policy continue, Miran’s call for significant rate reductions highlights a critical moment for the Federal Reserve as it navigates the complex interplay of interest rates, inflation, and labor market health.
