Analyzing Fed Governor Miran's Case for Aggressive Rate Cuts

Wall Street Journal columnist James Mackintosh recently challenged the reasoning behind Federal Reserve Governor Stephen Miran's call for aggressive interest rate cuts. Miran, who voted in favor of significant rate cuts last week, now provides theoretical support for former President Trump's demand for "massive rate cuts." If Miran's view holds, everyone else – not just the Fed, but also investors and independent economists – is wrong. Miran joined the Fed board shortly before the recent rate cut and still holds the title of chair of Trump's Council of Economic Advisers. He advocates for lowering the interest rate by nearly 2 percentage points further, to 2.5%, from the current range of 4%-4.25% after the last rate cut.

Miran's Core Arguments

In a speech on Monday, Miran outlined his rationale, focusing primarily on the policy changes implemented by the Trump administration: reduced immigration, lower government borrowing, and deregulation – all of which imply that "long-term interest rates should be lower." He believes Trump was pushing these policies forward. He plugged his estimates into the widely used "Taylor rule," thereby concluding that current interest rates should be significantly lower. (The "Taylor rule" is a monetary policy rule whereby a central bank adjusts the benchmark interest rate based on the inflation gap and the output gap.)

Potential Implications

If his view is correct, market pricing would need radical adjustment – but that's just an assumption. According to Miran, the U.S. economy is suffering from an "overly hawkish Fed," and bonds, exchange rates, and stock markets would need significant readjustment to accommodate that judgment. The adjustment in the bond market would be the most obvious. Miran believes that Trump's policy changes mean the "neutral real long-term interest rate" (i.e., the theoretical r-star) has fallen by more than 1 percentage point. If yields fell to the level Miran estimates, the price of 10-year U.S. Treasury Inflation-Protected Securities (TIPS) should rise by about 10%—again, this is just an assumption.

Economic Policy Impact

Assuming other countries do not cut interest rates simultaneously (after all, they did not implement Trump's policies), lower bond yields and increased easing by the Fed should lead to a significant weakening of the U.S. dollar. The combination of lower borrowing costs and a weaker dollar should be extremely beneficial to the stock market, even if the market is concerned that "stock prices are already too high and major indexes have hit new highs" – if Miran's view holds, the stock market should have risen even higher.

Analysis and Assessment

Some of Miran's views hold some truth: An economy with declining immigration (or even zero immigration) will see reduced demand for investment, so interest rates should be lower; if government borrowing falls, interest rates can be lowered accordingly; in addition, supply-side reforms can improve economic efficiency and reduce inflationary pressures, also providing a reason to cut interest rates. But the policy changes mentioned by Miran may not materialize as expected or may even have side effects. While immigration restrictions may impact some employers, they may also lead to labor shortages and rising wages, further pushing inflation higher. Tax increases help control deficits, but in the long run, revenue from “tariffs,” as the primary means of increasing taxes, will gradually decrease – because businesses and consumers will avoid tariffs by shifting purchases and production. Additionally, the effects of supply-side reforms such as "deregulation" are always difficult to predict. Miran also ignored the Trump administration’s interventions in the economy, such as the partial nationalization of chip manufacturer Intel.

Limitations of the Taylor Rule

More importantly, the "Taylor rule" that Miran relies on contains multiple variables and adjustments. The Atlanta Fed, through calculations using this rule, found that the recommended range for the interest rate is between 4.1% and 6.25%, depending on the "economic idle capacity measure" and the "r-star estimate." Even if it is reduced by 1-2 percentage points due to Trump's policy adjustments, the minimum recommended interest rate is already close to the level Miran advocates, but the maximum recommended interest rate is still at the upper end of the current interest rate range. Therefore, contrary to what Miran stated, there are good reasons to question "whether the Fed should continue easing monetary policy," and there are even reasons to believe that "current interest rates are already too low." Miran himself argued last year that the r-star is higher than the Fed's estimates, partly due to "large-scale AI investment" and "de-globalization" – and these two factors have only increased in influence since last year. But he deliberately ignored these two factors in his speech this week.

Current Economic Situation

The U.S. economy is currently growing surprisingly strongly: according to the Atlanta Fed's "GDPNow" model estimates, annualized growth in the third quarter is expected to exceed 3%. Similarly, the market is performing strongly: stocks, corporate bonds, and gold have all made strong gains. Companies and households have not reduced borrowing due to "high interest rates," but have instead steadily increased their bank loans. It is true that the labor market has weakened, but given that inflation has rebounded, "whether further interest rate cuts are needed" is far from clear. Perhaps Miran's views need some time to prove themselves, because the effects of monetary policy have "long and uncertain lags," and the "chaotic" policy changes implemented by Trump also need some time to penetrate the economy. But so far, the market does not agree with the rationale presented by Miran.