The Federal Reserve Board published a speech by Governor Stephen I. Miran setting out a framework for incorporating “nonmonetary” policy shifts into monetary policy analysis and arguing that current policy is materially restrictive. Miran’s “ballpark” estimate is that the appropriate federal funds rate is in the mid-2 percent area, almost 2 percentage points below the current setting, warning that keeping policy that tight risks unnecessary layoffs and higher unemployment. Using Taylor-type rules, Miran put particular emphasis on the neutral rate of interest (r*) and argued it may be falling due to 2025 changes in border, fiscal, trade, tax, and regulatory dynamics. He expects rent disinflation to feed through with a lag, with CPI rent inflation declining from roughly 3.5 percent to below 1.5 percent in 2027, implying a 0.3 percentage point decline in total personal consumption expenditures inflation (0.4 percentage point by early 2028). On r*, he cited a plausible reduction in annual population growth from about 1 percent to 0.4 percent if around 2 million unauthorized immigrants exit by year-end, which he associated with a nearly 0.4 percentage point drop in the neutral federal funds rate. He also pointed to deficit reduction from tariffs (Congressional Budget Office estimate of over USD 380 billion per year), USD 900 billion in foreign loan guarantees, and an estimated USD 3.83 trillion increase in national saving over 10 years from this year’s tax law as additional downward pressures, partly offset by higher investment and productivity effects from deregulation and energy policy. Aggregating these channels, he estimated an “appropriate” rate of about 2.0 percent under a balanced-approach Taylor rule and 2.5 percent under a standard rule, based on weighting a model-implied r* two-thirds and a market-implied r* one-third.

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