Last Year, Trump’s New Man at the Fed Thought Rates Were Too Low. What Changed.

Stephen Miran, a member of the Federal Reserve’s Board of Governors. (Michael Nagle/Bloomberg)

What a difference a year can make. In 2024, Stephen Miran argued in Barron’s that the Federal Reserve was holding its federal-funds target rate too low. Now he contends that the central bank is keeping its key policy rate too high—even after cutting it by a substantial 1.25 percentage points since last September.

What’s different now? The change in administrations has brought major shifts in policies, notably in taxes, tariffs, and immigration. Miran also has moved to the government, most recently as a member of the Fed’s Board of Governors while on leave of absence as chair of the Council of Economic Advisers at the White House. Last year, he served as a senior strategist at Hudson Bay Capital and as an adjunct fellow at the Manhattan Institute.

In his new position, Miran argues vigorously that changes in economic conditions mean a lower real (inflation adjusted) equilibrium interest rate. If this rate (dubbed r* by economists) is less than what is estimated, the actual fed-funds target is higher relative to r*, making monetary policy tighter than the Fed thinks.

“It is my view that previously high immigration rates and large fiscally driven decreases in net national saving, both of which raise neutral rates, were insufficiently accounted for in previous estimates of neutral rates,” Miran said in a speech on Sept. 22. “Monetary policy was not as tight as many believed. That same effect may be taking place today, but in the opposite direction. In my view, 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.”

The Federal Open Market Committee’s Summary of Economic Projections from its September meeting put the median estimate of the longer-run fed-funds rate at 3%. Subtracting the Fed’s 2% inflation goal implies an r* of 1%. But Miran posited in that speech that r* could be close to zero, consistent with a fed-funds rate around 2% to 2.5%—far below the current target range of 4% to 4.25%.

Miran dissented from the recent FOMC decision to trim the fed-funds target a quarter percentage point, preferring a half-point cut. He also confirmed that the 2.88% midpoint projection in the SEP for the end of 2025 was his. The median projection of 3.63% would imply quarter-point cuts at the October and December meetings.

His current contention that the Fed had rates too high is 180 degrees away from what he wrote in Barron’s in March 2024, when he said the forces that had brought the interest-rate level to historic lows following the great financial crisis and Covid had dissipated. Notably, household debt was no longer declining. Technology investment also had shifted to artificial-intelligence projects, requiring huge capital expenditure, from previous asset-light investments in software.

Moreover, immigration was surging at that time, which tends to lift housing costs, especially rents. Globalization was reversing, reducing excess global savings being funneled into U.S. capital markets. Wars, related sanctions, and tariffs were incentivizing domestic investment, requiring capital spending but not improving efficiency. Finally, he called out the “unprecedented fiscal recklessness of running nearly $2 trillion deficits during a peacetime boom.”

On that, not much has changed, TS Lombard economist Steven Blitz wrote in a recent client note. As the chart below shows, even assuming that tariffs bring in $350 billion a year, in line with the annual pace of recent months, they trim the deficit to $1.65 trillion annually from $2 trillion—“an improvement but hardly a reversal in trend,” he wrote. That means a deficit running at a still-massive 5% of gross domestic product, from over 6% previously.

Created with Highcharts 9.0.1Tariff Impact?Tariff revenue lowered the federal deficit only slightly from what Stephen Miran wrote​last year was “unprecedented fiscal recklessness.“Source: BloombergNote: Cumulative monthly deficit. Fiscal year ends in Sept.; fiscal 2025 data through August.

Created with Highcharts 9.0.1Fiscal 2025 DeficitFiscal 2024 Deficit2024-10-312025-01-312025-04-302025-07-31-2,500-2,000-1,500-1,000-500$0 billion

Much of Miran’s current hypothesis is based on the notion that the rise in rents should wane further with the exit of undocumented immigrants, who were thought to have added to this source of inflation.

J.P. Morgan chief economist Michael Feroli notes that this is based on an academic paper on the effects of the 2003 Mariel boatlift, which only discusses real rents over a short period. Miran extrapolates this experience out to 2028. (Arguably, the main lift to rents has been the unaffordability of housing, forcing would-be home buyers to rent.)

A Congressional Budget Office study found that immigration raised rents but also lowered services inflation (excluding energy and housing), Feroli adds. More recently, slowing growth in nonfarm payrolls can be traced in part to reverse migration’s downward effect on the workforce, which has held the jobless rate at 4.3%, just above the FOMC’s median 4.2% long-run estimate.

There are internal contradictions in Miran’s argument that current policies should lower the Fed’s policy rate. He cites a paper that concludes a tariff shock should lower r*, Feroli writes, but that is associated with an economic contraction.

“Public policies that effectively lower the real rate are not growth enhancing; they are just the opposite,” Blitz points out. “Needing to cut rates to offset a lower neutral rate is tacit admission that administration policies need lower interest rates as an offset.”

The rest of the FOMC is unlikely to be persuaded by Miran’s arguments for lower interest rates, notes Feroli. A marked weakening in the labor market may result in sharp interest-rate cuts, although that isn’t the basis of the newest Fed governor’s advocacy.

“Another way Miran’s policy preferences could be realized is if the rest of the committee were to also be closely allied with the White House’s preferences,” he says.

If Fed governor Lisa Cook were to lose her lawsuit before the Supreme Court fighting her firing by President Donald Trump, it is possible other governors could be at risk of dismissal. In that case, the Fed’s board could be packed with partisan governors, who could then dismiss district presidents next year and replace them with like-minded policymakers, Feroli adds.

And Trump has vowed to get rid of Jerome Powell when his term as Fed chair ends next May. A stacked FOMC would be more likely to see things Miran’s way, although currency, bond, and equity markets are apt to view the situation in a more negative light.

Write to Randall W. Forsyth at randall.forsyth@barrons.com