How Not to Do Monetary Policy

When bad policy arguments meet wishful monetary thinking

Here’s the gist of Governor Stephen Miran’s speech at the Economic Club of New York on September 22^nd – a speech obviously meant to justify his endorsement of cutting interest rates by 50 basis points.

Miran argues the Fed’s policy rate is about two percentage points too high. He writes: “Based on this analysis, I believe the appropriate fed funds rate is in the mid-2 percent area, almost 2 percentage points lower than current policy. “ He comes to this conclusion by using Taylor-rule logic and looking at three non-monetary policies variables.

First, policies affecting inflation. Miran argues that official inflation measures will soon fall because rents in new leases are already flat, and with immigration dropping, rental demand will weaken further, dragging rent inflation down.

Second, policies affecting r*. r* is lower than we believe because population growth is dropping amid stricter border policy, and because “national saving” is rising from tariffs, East Asian loan guarantees tied to trade deals, and the new tax law.

Third, Miran looks at policies affecting the output gap. He argues that the recent tax law boosts both demand and supply, leaving the gap roughly unchanged but giving a slight upward nudge to the policy rate. Deregulation and energy policies, by contrast, raise potential output faster than actual output can catch up, widening the gap and pulling the policy rate lower.

After folding these effects together with his inflation and r* adjustments, Miran concludes that the fed funds rate should be in the mid-2s, far below the current stance. Monetary policy is too restrictive, he believes.

Here are a few thoughts on Miran’s unusual exercise:

First, Miran treats protectionism and state-directed credit as if they were benign “savings” that somehow push r* lower. Calling tariffs a virtue because they raise federal revenue and might shrink the deficit is fiscal alchemy. Tariffs are distortionary taxes: they raise domestic prices, misallocate capital and labor, and invite retaliation. To present them as a clean increase in “national saving” is to ignore the growth and supply-chain damage they impose. Likewise, labeling $900 billion of government-negotiated foreign loan guarantees as an “exogenous increase in credit supply” is, at best, bizarre. More bizarre still is Miran’s comfort with government credit allocation. These are poor substitutes for market finance and price signals, not reasons to pull the Fed’s lever.

Meanwhile, a substantial drop of immigration is usually understood as having an inflationary component, especially in services where the share of immigrants is high relative to the rest of the economy. The drop in immigration impact on rent, on the other hand, will be long to materialize. The impact stretches out over many months or even years, filtering gradually into the inflation data as leases renew, rents adjust, and new supply (or constraints) work through the system.

Second, Miran shifts his treatment of prices depending on the story he wants to tell. On tariffs, he dismisses consumer-price impacts by claiming exporters will eat the costs. But a few pages later, he leans heavily on immigration-driven rent disinflation to carve multiple tenths off core inflation and the policy rate. He can’t have it both ways: either policy shocks move prices or they don’t. If border crackdowns depress rents, broad tariffs will raise goods prices. A serious economist wouldn’t ignore one while exaggerating the other.

Third, Miran wants monetary policy to offset negative supply shocks caused by the administration. He argues that tighter border rules reduce population growth and labor supply, which lowers r*, so the Fed should cut rates. That is a plea for the central bank to mask the costs of government-imposed distortions with easy money. A better solution would be to stop kneecapping labor supply with deportation quotas and let markets clear, not conscript the Fed into fueling inflationary risks.

His fiscal arithmetic is not any stronger. He credits the new tax law (the OBBB) with a $3.8 trillion improvement in national saving that lowers r*, even though independent projections show deficits widening. Worse, he tries to have it both ways: the law allegedly reduces deficits and r*, while at the same time raising investment demand and therefore r*. He then nets out the numbers in whatever way supports his preferred rate cut. A serious analysis would start with actual cash-flow projections, not advocacy-shop multipliers that conveniently deliver the desired answer.

Miran also mixes deregulatory rhetoric with central planning. Deregulation and energy liberalization raise potential output. But tariffs, quota-like borders, and government-structured loans are the opposite: they tighten political control over who may trade, invest, or work. That cocktail is incoherent. You don’t restore market dynamism by micromanaging trade and labor flows, then ask the Fed to mop up the mess.

In short, Miran’s framework is inconsistent, politically convenient, and analytically weak. If prices, investment, and labor supply adjust to market conditions, the Fed doesn’t need to reverse-engineer r* to justify a rate cut.