Federal Reserve Governor Stephen Miran, the new kid at the Eccles Building, wants 50-basis-point interest rate cut. When does he want them? Now! Since arriving at the US central bank, President Donald Trump’s appointee to the Board of Governors has been on a one-man crusade to convince his colleagues, a la Henry Fonda’s character in 12 Angry Men, that super-sized rate cuts are warranted to boost the labor market and sustain economic momentum.
Stephen Miran Takes New York
The current federal funds rate, a key policy rate that influences borrowing costs for consumers and households, was lowered to a target range of 4% to 4.25% at the September Federal Open Market Committee (FOMC). This was the first interest rate cut of the year, and the Summary of Economic Projections suggests a couple more reductions are on the horizon.
Miran took a Sept. 22 field trip to the Economic Club of New York, delivering his first public speech since his confirmation to the Fed. Unsurprisingly, he defended his lone dissent at the September FOMC, where he championed a half-point reduction to the key policy rate.
According to Miran, the federal funds rate should be at 2.5%, suggesting that the central bank needs to deliver jumbo cuts in the coming months. Or, in other words, Fed Chair Jerome Powell and his colleagues have a lot of catching up to do.
His primary argument is that leaving monetary policy too restrictive for too long "risks unnecessary layoffs and higher unemployment.” Put simply, the current target range "brings significant risks to the Fed's employment mandate." Additionally, Miran contended that the Trump administration's public policy pursuits are crafting a vastly different economic landscape than the one monetary policymakers observe. He pointed to deregulation, changes to immigration and tax policy, and rising tariff revenues.
Throughout his prepared remarks, Miran referenced the so-called Taylor Rule when discussing the r-star, which is the neutral federal funds rate (policy is neither restrictive nor accommodative). This concept was proposed by economist John Taylor more than 30 years ago and aims to determine the short-term interest rate by evaluating inflation and the economic output gap.
“Including the inflation and output channels along with the median model-implied r-star, the fed funds rate should be around 2% to 2.25% under the standard Taylor rule approach,” Miran told the audience of business leaders and economists.
Stephen Miran may have made a compelling case, presenting economic models, data, and textbook language. But is it enough to persuade his colleagues at the Eccles Building?
Fed Week
Following the highly anticipated FOMC meeting, numerous Federal Reserve officials took to the media, participating in interviews and delivering public remarks. One of them was, of course, Jerome Powell. Speaking in Rhode Island on Sept. 23, the central bank chief admitted that weakening employment conditions were the main reason for the quarter-point rate cut.
“Near-term risks to inflation are tilted to the upside and risks to employment to the downside — a challenging situation. Two-sided risks mean that there is no risk-free path," Powell said. “The increased downside risks to employment have shifted the balance of risks to achieving our goals. This policy stance, which I see as still modestly restrictive, leaves us well positioned to respond to potential economic developments.”
While there are upside risks to inflation, Powell and forecasters agree that any increase will be a one-time price adjustment, echoing the various economic models. The labor market, however, faces a series of headwinds, or a “curious balance,” as Powell has described the jobs arena. At the same time, Powell noted that employment conditions are stable, with the unemployment rate hovering at a historically low level of around 4%.
Fed Vice Chair for Supervision Michelle Bowman, meanwhile, expressed urgency. She also delivered a speech at the Kentucky Bankers Association Annual Convention on Sept. 23, discussing the "materially more fragile labor market."
"The U.S. economy has been resilient, but I am concerned about the weakening in labor market conditions and softer economic growth," Bowman said. "I am concerned that the labor market could enter into a precarious phase, and there is a risk that a shock could tip it into a sudden and significant deterioration."
Despite her concerns, she did not join Stephen Miran in demanding a half-point rate cut.
Others, including St. Louis Fed President Alberto Musalem and Cleveland Fed President Beth Hammack, are more cautious about cutting interest rates. While they were supportive of restarting the institution’s easing campaign, they espoused reservations about going any further. “The stance of monetary policy now lies between modestly restrictive and neutral, which I view as appropriate,” Musalem said in a speech. “However, I believe there is limited room for easing further without policy becoming overly accommodative, and we should tread cautiously.”
The Labor of Hercules
Right now, it is safe to say that Powell is correct when he says the United States is in a “low fire, low hire economy.” However, economics also tells us that when the labor market turns south, it can rapidly deteriorate. Is this happening right now? After abysmal back-to-back jobs reports, elevated jobless claims, and overestimated payroll growth, the US economy could be in a quagmire – and the lag effect of monetary policy will serve as a hindrance to rescuing America.
