Fed has excess focus on backward-looking data, says former Fed Governor Stephen Miran

Key Concepts

• Monetary Policy Lags: The 12–18 month delay between interest rate adjustments and their actual impact on the economy.
• Forward-Looking Policy: The necessity of setting interest rates based on future economic forecasts rather than current, backward-looking data.
• Supply Shocks: External events (e.g., energy price spikes, AI advancements) that influence inflation but are often transient.
• Structural Inflation Drivers: Persistent factors like housing (shelter) and labor markets that provide more reliable long-term forecasting data.
• Inflation Expectations: The market’s belief regarding future inflation; a critical metric for maintaining central bank credibility.

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1. The Case for Rate Cuts: Policy Lags

Stephen Myron, former Fed Governor and current Senior Strategist at Hudson Bay Capital, argues that the Federal Reserve’s current approach is overly reliant on "backward-looking" data. He emphasizes that because monetary policy has a 12–18 month lag, the Fed should be setting rates based on where the economy is expected to be in the second half of next year, rather than reacting to recent inflation prints.

• Core Argument: If policy were merely a reaction to current data, it could be automated. Effective governance requires forecasting future supply-demand balances.
• Critique of Current Fed Stance: Myron suggests that his former colleagues are currently too focused on mechanical responses to recent data, which he views as insufficient for long-term economic management.

2. Structural Drivers vs. Transient Shocks

Myron distinguishes between factors that provide reliable forecasting signals and those that are merely "noise."

• Reliable Indicators:
  • Shelter/Housing: Market rents have grown at approximately 1% for nearly three years. Because this data is persistent, it will inevitably "bleed" into measured inflation indices, acting as a disinflationary force.
  • Labor Market: Like housing, labor market trends are long-lived and provide a clearer, more stable read on future inflation than volatile supply shocks.
• Transient Shocks: Events like the Iran conflict and subsequent energy price spikes are difficult to extrapolate 12–18 months into the future. Myron argues that unless there is a specific forecast for persistent negative supply shocks, the Fed should not assume inflation will remain materially above target.

3. Credibility and Inflation Expectations

A central point of debate is whether cutting rates while inflation is above target damages the Fed’s credibility. Myron refutes this by linking credibility directly to inflation expectations.

• The Credibility Framework: As long as long-term inflation expectations (beyond the one-year horizon) remain stable, the Fed’s credibility is intact.
• The Trigger for Concern: Credibility only becomes an issue if long-term expectations begin to shift, as this would signal that the market no longer believes the Fed will achieve its target in the future.

4. Notable Statements

• "If all you had to do was make policy based on backward-looking data, a machine could do it. You wouldn't need people." — Stephen Myron, emphasizing the human element of forecasting.
• "I don't see a reason for thinking why inflation would be running very high in the second half of 2027... I think that there's maybe an excess focus on some backward-looking data."

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Synthesis and Conclusion

The main takeaway from Myron’s perspective is that the Federal Reserve is currently prioritizing short-term data points over the structural realities of the economy. By focusing on persistent disinflationary pressures in the housing and labor sectors, Myron advocates for a more proactive, forward-looking approach to rate cuts. He maintains that the Fed’s credibility is not tied to current inflation prints, but rather to the stability of long-term inflation expectations, which currently remain anchored. His framework suggests that the Fed should look past transient supply shocks and focus on the 12–18 month horizon to avoid keeping rates unnecessarily high.