Deep Briefing:

  • Federal Reserve Governor Stephen Miran on Monday pushed back against the risk that tariffs could fuel inflation and called for two half-percentage-point rate cuts over the next quarter to avoid a rise in unemployment.
  • Miran said tariff revenue, tax policy, and immigration controls may have brought the so-called neutral rate—the level of interest rates that neither stimulates nor slows the economy—below estimates by other Fed officials, clearing the way for rapid monetary easing.
  • "The bottom line is that monetary policy is clearly in restrictive territory," Miran said in remarks to the Economic Club of New York, "and keeping short-term rates about 2 percentage points too high could trigger unnecessary layoffs and higher unemployment."

Deep Analysis:

Miran dissented at last Wednesday's policy meeting, when other policymakers cut the benchmark rate by 25 basis points to a range of 4% to 4.25%, while he favored a half-point reduction.

Miran said most Fed officials, while also citing labor market weakness, overestimated inflation risks, especially the role of tariffs in boosting price pressures.

"Relatively small changes in some goods prices have triggered what I consider an unwarranted level of concern," he said.

Instead, Miran predicted that import taxes would reduce the federal budget deficit, slow government borrowing, and ease upward pressure on interest rates. He noted that the Congressional Budget Office estimates tariff revenue could reduce the budget deficit by more than $380 billion annually over the next decade.

The monetary policy debate that triggered Miran's dissent last week spilled into the public arena on Monday. St. Louis Fed President Alberto Musalem said he sees limited room for further monetary easing.

"I supported the FOMC's 25-basis-point cut in the policy rate last week as a precautionary move to support the labor market at full employment and prevent it from weakening further," Musalem said in remarks to the Brookings Institution.

"However, I see limited room for further rate cuts without policy becoming overly accommodative," he said.

Musalem pointed to record stock markets, tighter credit spreads, and healthy bank lending as providing ample momentum for economic growth.

Moreover, policymakers should not lose sight of the mission to bring inflation down to target. Inflation could remain persistently above the central bank's 2% goal due to tariffs or slower growth in labor supply.

Nevertheless, "if more signs of labor market weakness emerge, I would support further cuts to the policy rate, provided that the risk of inflation remaining above target has not increased and long-term inflation expectations remain anchored," Musalem said.

Miran downplayed concerns that his failure to resign from his role as President Donald Trump's chief economic adviser could undermine the Fed's independence. Instead, Miran has taken an unpaid leave of absence until his term at the central bank expires in January.

Trump has for months called on Fed Chair Jerome Powell to lower borrowing costs to stimulate economic growth and reduce the cost of servicing federal debt. He has repeatedly disparaged Powell, calling his failure to cut the benchmark rate by more than 3 percentage points incompetent.

Miran, in response to questions, said Trump has not tried to influence his monetary policy stance, and that he would resign from his White House role if he were to remain at the Fed after January.

Miran said he would dissent again if he deemed it necessary. "I will not vote for decisions I do not agree with in order to create a false impression of consensus that does not exist."