Milan calls for a rapid and significant interest rate cut! Morgan Stanley pours cold water: the argument lacks persuasiveness and is unlikely to gain internal support from the Federal Reserve

According to the Zhitong Finance APP, the new Federal Reserve Governor Stephen Miran stated on Monday that the current interest rate level is too high and called for a significant and rapid interest rate cut in the coming months to avoid unnecessary layoffs in the labor market.

This is the first time Miran has publicly spoken about policy positions since joining the Federal Reserve Board. Miran pointed out that the neutral interest rate (the rate level that neither stimulates nor suppresses the economy) is significantly declining. This rate may have been systematically overestimated in the past, and recent changes in tariffs, immigration restrictions, and domestic tax policies have further depressed the neutral rate. Therefore, to avoid harming the economy, interest rates need to be significantly lowered.

In his speech at the New York Economic Club, he stated, "In short, monetary policy has entered a deeply restrictive zone. Maintaining short-term interest rates about two percentage points above the neutral level could lead to unnecessary layoffs and higher unemployment rates."

As a new governor appointed by President Trump, Miran advocates for immediate and larger interest rate cuts, a position consistent with Trump's demands, but it is a minority view within the Federal Reserve's decision-making body. It is reported that Miran's estimated neutral interest rate is about 2.5%, significantly lower than the Federal Reserve officials' median forecast of 3%.

Notably, Miran reiterated on Thursday that if the Federal Reserve fails to quickly lower interest rates, it could harm the economy. Miran emphasized that officials could quickly implement a series of larger interest rate cuts to return to the neutral level as soon as possible, rather than gradually advancing throughout the year. He added, "My view is that we can achieve policy rebalancing in a very short time through a series of 50 basis point cuts, and then act more cautiously after reaching the neutral level."

After reviewing Miran's arguments, JP Morgan believes that some of them are "questionable, others incomplete, and hardly any are persuasive." JP Morgan's Chief U.S. Economist Michael Feroli stated on Thursday, "Unless there is a radical change in the composition of the Federal Open Market Committee (FOMC), we do not believe Miran's claims will gain support."

Michael Feroli stated, "We carefully examined Miran's arguments and found them indeed hard to believe. However, we do not think these arguments are persuasive. We also strongly doubt whether they will convince other members of the FOMC. Therefore, we maintain our previous forecast that interest rates will be gradually lowered by 25 basis points until they reach 3.25%-3.5% by early next year."

Michael Feroli stated, "Miran's speech showcases a dovish stance in the monetary policy debate. The core of his argument is the importance of a lower valuation of the actual neutral interest rate." He believes that Miran's reasoning is "selective and purposeful," which "is almost impossible to persuade a committee that will scrutinize every argument in detail."

In his speech on Monday, Miran also gave an optimistic assessment of rent inflation, believing that it will take time for rent inflation to be reflected in official inflation data. In response, Michael Feroli pointed out, "Almost all of Miran's discussions on inflation focus on rent inflation. As for other components, he assumes they will 'continue to maintain the current trend.'" As Milton Friedman warned many years ago, merely observing inflation risks that exclude certain prices can confuse relative price changes with overall price level changes."

Michael Feroli stated, "This is just the tip of the iceberg in criticizing Milan's arguments. Dissecting all the points he has 'thrown out' will take a considerable amount of time. But the key is that the Federal Reserve's governors, regional Fed presidents, and their teams have enough time and expertise to dismantle these arguments." He added, "While Milan will have more opportunities in the future to try to persuade the committee of the validity of his arguments, we doubt other members will find these arguments convincing, especially when they overlook the risks of rising inflation."