Trump's Fed governor appointee, Stephen Miran, gave a detailed speech today at the Economic Club of New York.
As we discussed last week following the Fed decision, he was the lone dissenter, voting for a 50 basis point cut. And he was obviously the low dot on the Fed's dot plot – which suggested he is pushing for a fast recalibration, to get the policy rate near the neutral level.
With that, today he laid out why he believes the appropriate Fed Funds rate is in the mid-2s — roughly 200 basis points lower.
Up to last Wednesday, the Fed's pause in the easing cycle has been driven by Trump policies — specifically, the Fed's assumptions that tariffs would be inflationary.
Miran's framework is also tied to Trump policies, but he makes the case that they are disinflationary.
On immigration, he thinks we could see net outflow of as many as 2 million illegal immigrants by year end. Lower population growth leads to lower labor force growth which, as he says, has historically resulted in a low neutral rate (i.e. the policy rate that is neither restrictive nor stimulative).
On tariff revenue, which is tracking well north of $300 billion/year (representing about 1% of GDP), he cites a study that estimates each percentage point reduction in the deficit-to-GDP reduces the neutral rate by 4/10ths of a percent.
So, the Fed has been marking UP its projection for the long-run neutral rate, since the post-covid inflationary spike — moving it up to the current 3% level this year. Miran's view on a much lower neutral rate would mean the Fed policy is even tighter than they think.
On inflation, he ties in de-immigration to falling rents, which have already been in negative year-over-year growth since the summer of 2023 — orange line below (private market data). It just hasn't caught up in the stale government data yet — the blue line. When it does, given the heavy weighting it gets in the inflation data, it will slash a full percentage point from CPI.
With all of the above in mind, we've talked about the coming regime change at the Fed for several months. It's starting with a powerful dissenting voice inside the Fed.
This public analysis from Miran should give comfort to market bulls, and discomfort to the (relative) hawks at the Fed.
