Fed’s Miran calls for rate cuts, cites restrictive policy risks

Investing.com -- Federal Reserve Governor Stephen Miran believes the appropriate federal funds rate should be in the mid-2 percent range, almost 2 percentage points lower than current policy, according to remarks delivered Monday at the Economic Club of New York.

In his first speech since joining the Federal Reserve Board, Miran explained why his view of appropriate monetary policy diverges from other Federal Open Market Committee (FOMC) members, stating that current policy is "very restrictive" and poses "material risks" to the Fed’s employment mandate.

Miran outlined several nonmonetary factors that have changed significantly in 2025, including shifts in border and tax policies, trade renegotiation, and regulatory dynamics, which he believes are exerting 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 said.

The governor highlighted how changes in immigration policy are affecting both inflation and neutral rates. He noted that net immigration, which averaged about 1 million per year before the pandemic, has shifted dramatically, with approximately 1.5 million immigrants leaving the country in the first half of this year.

"It is plausible to me that 2 million illegal immigrants will have exited the country by year-end, thereby reducing annual population growth from 1 percent to 0.4 percent," Miran said, adding that this decline in population growth equates to a nearly 0.4 percentage point drop in the neutral fed funds rate.

Miran also pointed to recent tax legislation and trade policies as factors increasing national saving and reducing the neutral rate. He estimated that tariff revenue could reduce the federal budget deficit by over $380 billion per year over the coming decade, which would lower the neutral rate by half a percentage point.

On inflation, Miran expects rental inflation to decline from its current level of roughly 3.5 percent to below 1.5 percent in 2027, contributing to a 0.3 percentage point decline in total PCE inflation.

After weighing various factors affecting inflation, the neutral rate, and the output gap, Miran concluded that the appropriate federal funds rate should be around 2.5 percent under the standard Taylor rule approach and approximately 2 percent under the balanced approach.

"Leaving short-term interest rates roughly 2 percentage points too tight risks unnecessary layoffs and higher unemployment," Miran warned, while reaffirming his commitment to bringing inflation sustainably back to 2 percent.

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