Federal Reserve's Milan: Inflation risks are controllable, supports continued rate cuts, estimates neutral interest rate may be 0.5%

Federal Reserve Governor Stephen Miran stated on Tuesday that he believes there is not as much conflict between the Fed's two main goals of "maximum employment" and "price stability" as some of his colleagues at the Fed are concerned about.

Miran reiterated that factors such as slowing population growth, along with his expectation that President Trump's tariff policies will have a limited impact on inflation, mean that the Fed can continue to cut interest rates.

Speaking at the "2025 Policy Outlook" forum hosted by the Managed Funds Association in New York on Tuesday, Miran said:

"The reason my 2025 interest rate forecast is significantly lower than others is that I am more optimistic about the inflation outlook."

"So I believe the contradiction between the dual mandate is not as severe as others perceive."

Miran's confidence in the inflation outlook mainly stems from his expectation that housing service prices will continue to drive inflation down, as housing represents a significant portion of overall price growth. He stated:

"I am more focused on population growth, perhaps I give it more weight, or believe its impact is greater. At the same time, I am not as concerned about the inflation effects of tariffs. These factors make me more optimistic about inflation than some of my colleagues."

Miran expressed dissent regarding the decision made by the majority of committee members at last month's policy meeting. At that time, the Fed cut interest rates by 0.25%, marking the first rate cut of 2025, while Miran believed it should have been a 0.5% cut.

He had previously pointed out that the Fed's current policy stance has a very strong tightening effect on the U.S. economy, and officials should quickly correct this situation through a series of 0.5% rate cuts.

However, most other decision-makers remain cautious about cutting rates too quickly. Some officials believe the Fed must be wary of the persistent upward price pressure that tariffs may bring; others have pointed out that inflation has been above the Fed's 2% target for several years, thus requiring continued vigilance against a rebound in prices.

These concerns may limit some officials' willingness to cut rates further and complicate the Fed's situation in light of signs of a slowdown in the labor market. Powell previously stated that last month's rate cut was a "risk management" measure aimed at supporting the job market.

Additionally, the market expects that the next monetary policy meeting scheduled for October 28-29 may also be more challenging. Due to the prolonged government shutdown, several government statistical agencies have suspended the release of important economic data, which is crucial for the Fed's decision-making.

"Neutral interest rate at 0.5%"

Miran also stated that the uncertainty that plagued businesses and consumers earlier this year has largely dissipated, and he holds an optimistic view of the economic outlook, provided that the Fed properly addresses the risks of overly tight monetary policy.

He said:

"In the short term, I am not pessimistic about the economy, but if we do not adjust our policy, potential risks still exist."

He reiterated that the neutral interest rate for monetary policy has decreased compared to last year

"This means that the current monetary policy is more restrictive than it was a few quarters ago, and additional tightening risks may emerge in the future."

"When estimating the neutral interest rate, one must show humility. My best guess is that the actual neutral interest rate is 0.5%."

Milan acknowledges that his views on interest rates differ from those of several Federal Reserve officials, particularly regarding his advocacy for a quicker return to the neutral interest rate. He explains that the differences partly stem from his belief that monetary policy should be formulated "prospectively."

"When formulating policy, it should not be based on data from six months ago, but rather on your judgment of trends over the next six months to two years, depending on how long you believe the lag in policy transmission is."

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