Fed Governor Miran: The Case For Big Rate Cuts | Miran on Deterioration in Labor Market, the Neutral Rate of Interest, and Fed Balance Sheet Policy

Episode Summary

Executive Summary: Fed Governor Stephen Myron argues the Fed is still too restrictive and should move faster toward a lower neutral rate, citing backward-looking inflation data, cooling labor demand, faster-than-usual shifts in neutral from population and policy changes, and signs of stress in funding markets. He expects a December cut, supports ending QT, but rejects active MBS sales for now.

Main Topics: Why Myron wants faster rate cuts (Priority: 5/5): Myron says policy should be closer to neutral because inflation looks more benign than official measures imply and the labor market has softened enough that keeping rates restrictive risks an unnecessary downturn. Inflation is backward-looking and partly 'phantom' (Priority: 5/5): He argues shelter inflation lags market rents and that some services inflation is imputed rather than directly paid by households, making headline and core inflation look hotter than underlying market-based measures. Neutral rate has fallen sharply (Priority: 5/5): Myron says R-star has declined materially over the year due to rapid shifts in population growth, fiscal/tax dynamics, and other structural changes, so the Fed’s stance is tighter than it appears. Tariffs, tax policy, and savings effects (Priority: 4/5): He contends tariffs can lower the neutral rate by raising national savings through deficit reduction, and he argues the 'One Big Beautiful Bill' likely has limited deficit impact on a current-policy basis and may even support growth and lower deficits over time. December FOMC outlook and pace of easing (Priority: 4/5): He expects a December cut barring surprises and prefers 50 bp moves over 25 bp moves to get to neutral faster, though he says 75 bp is unnecessary because he is not signaling panic or recession. Labor market softness and data gaps (Priority: 4/5): Using alternative data during the shutdown, he says labor demand is weakening: wage moderation, easier hiring, and less confidence in finding jobs support his view that policy is too restrictive. Balance sheet policy and funding-market stress (Priority: 5/5): Myron supports ending QT and says reserves should be ample for the banking system, but notes that continuing MBS runoff still transmits tightening via duration and credit risk. He sees recent repo/fed funds sensitivity as a warning sign. Private credit and financial conditions (Priority: 3/5): He is not alarmed by private credit per se, but views recent clustered credit events as possibly a sign that monetary policy is restrictive and notes that public-market financial condition indexes may miss where credit growth has actually occurred.

Key Arguments: Policy should be nearer neutral because underlying inflation is lower than official readings suggest and the labor market has weakened. Shelter inflation is lagging market rents; market rents are running near 1% annualized, so official shelter inflation should keep easing. Some inflation components are imputed or mechanically linked to asset prices, so they do not reflect prices households directly pay. Neutral rates can move faster than usual when underlying drivers like population growth change abruptly; Myron estimates a sizable decline in R-star this year. Tariff revenue and stronger growth can raise national savings and push neutral rates lower, not higher, through the loanable-funds channel. The Fed should not wait for recession-like deterioration to ease; it should avoid keeping policy restrictive longer than needed because monetary policy works with long and variable lags. December is likely to bring another cut, but the exact pace depends on incoming data and voting dynamics. Ending QT is appropriate because reserves are nearing the point where funding markets become sensitive, but active MBS sales would unnecessarily crystallize taxpayer losses. Central bank independence matters because policy should focus only on stable prices and maximum employment, not political objectives.

Data Points: Fed dissent size: 2 consecutive meetings - Myron dissented in both October and the prior meeting, preferring 50 bp cuts instead of 25 bp. Preferred rate cut size: 50 basis points - His preferred easing step for recent meetings and for getting to neutral faster. Neutral rate change estimate: about 1.25 percentage points (125 bps) lower - Myron says his calculations indicate R-star fell materially this year. Population-growth effect on neutral: 36 basis points decline - He attributes part of the R-star drop to a rapid population-growth reversal. Tariff-related deficit reduction: almost $4 trillion over 10 years - He cites CBO estimates of lower deficits from tariffs as a source of higher national savings. Growth/deficit relationship: ~$4 trillion deficit reduction over a decade for +1 percentage point growth - He argues stronger growth lowers deficits enough to reduce neutral rates. Market rent growth: about 1% annual rate - He says new lease rents in market data are rising far below official shelter measures. Market-based core services inflation: 2.3% to 2.32% - He says market-based services ex-housing inflation is much closer to target than headline readings. Official Fed funds rate referenced: 4.09% - Used when discussing his September 22 speech and the gap to his preferred policy level. Implied appropriate rate level: about 2.34% - Derived from his stated view that rates should be roughly 175-200 bps lower than 4.09%. Lowest SEP dot for 2026: 2.6% - Referenced when discussing the Fed’s projected path versus his preference. Lowest SEP dot for 2027: 2.4% - Used to show how far out the committee’s projection reaches his preferred level. Housing duration of QT runoff: about 30 years - He says passive runoff of MBS would take a very long time to fully unwind. Fed rate sensitivity concern: repo and fed funds rates moving 3-4 bps higher than typical - Used by the interviewer to describe funding stress prompting QT cessation.

Pivotal Quotes: "I don't see a point of getting there slowly." — Stephen Myron: Explaining why he favors faster rate cuts toward neutral instead of gradual 25 bp steps. "A lot of the inflation that we see is A, backward-looking and B, some of the other rest of it is phantom" — Stephen Myron: His summary of why official inflation is overstating current underlying price pressure. "It would be better to just stop reductions in the balance sheet immediately." — Stephen Myron: His view that QT should have ended sooner because marginal risks to funding markets outweigh small benefits.

Implications: Listeners should expect Myron to keep pressing for faster easing and to frame inflation as less threatening than official data imply. His comments suggest a December cut is likely, QT is near its end, and private/funding-market strains may become a bigger policy focus.