Fed's Miran talks why he wants rates to be even lower, Trump's tariff case goes before SCOTUS

Key Concepts

• Monetary Policy: Actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• Output Gap: The difference between the actual output of an economy and its potential output. A positive output gap means the economy is producing above its potential, potentially leading to inflation, while a negative output gap means it's producing below potential, potentially leading to unemployment.
• Neutral Rate: The theoretical interest rate at which monetary policy is neither expansionary nor contractionary, meaning it neither stimulates nor slows down the economy.
• Supply Side Policies: Government policies aimed at increasing the economy's productive capacity, such as tax cuts, deregulation, and investment incentives.
• Demand Side Policies: Government policies aimed at influencing aggregate demand, such as fiscal stimulus (government spending and tax cuts) and monetary policy (interest rate adjustments).
• Imputed Services: Services that are not directly purchased but are estimated and included in economic data, such as financial services like portfolio management fees.
• Shelter Inflation: Inflation related to housing costs, including rent and mortgage payments.
• Basis Points (bps): A unit of measure used in finance to describe the smallest change in interest rates or other financial percentages. 100 basis points equal 1%.

Summary

Labor Market and Economic Outlook

Governor Myrin discusses the latest private sector job growth report, which showed a positive swing to 42,000 jobs in October from a negative 29,000 in the previous period. He notes that this growth is primarily driven by larger companies. However, Myrin emphasizes caution in interpreting any single report, especially given the ongoing government shutdown which hinders access to official data crucial for monetary policy decisions. He highlights that pre-existing trends in the labor market appear to be continuing, characterized by modest overall job creation, moderating wage growth, and indications that labor demand may not be as strong as desired from a cyclical perspective. These observations lead him to believe that interest rates could potentially be lower than current levels.

Structural vs. Cyclical Factors in the Labor Market

Myrin distinguishes between structural and cyclical factors influencing the labor market. He argues that policy changes, such as those related to immigration, are largely "output gap neutral." Economically, monetary policy's role is to balance supply and demand to prevent extreme inflation or deflation. Changes in population growth due to immigration policies, for instance, affect both the number of workers and consumers, thus not significantly altering the output gap. Therefore, monetary policy does not automatically respond to such structural shifts.

He also addresses the impact of supply-side policies, like tax incentives for investment in factories and equipment (100% expensing on PP&E), and investments in technology and AI. While these policies can boost productive capacity and investment demand in the short to medium term, Myrin believes their impact on the labor market is a longer-term story, potentially extending to 2026. He also points to deregulation as another factor that can influence the supply side of the economy, potentially expanding output gaps that monetary policy should address.

Monetary Policy Framework and Tools

Myrin outlines that monetary policy typically responds to three key factors:

1. The Output Gap: The difference between actual and potential economic output.
2. The Outlook for Inflation: Future price level expectations.
3. Changes in the Neutral Rate: The interest rate that neither stimulates nor restricts the economy.

He stresses the importance of analyzing how various policies affect these three elements to inform monetary policy decisions.

Impact of Tariffs and Trade Uncertainty

The discussion shifts to the Supreme Court's deliberation on the President's authority to impose tariffs under emergency economic powers. Myrin acknowledges that increased uncertainty surrounding tariffs and trade environments can act as a drag on the economy, potentially pressuring growth and hiring. He suggests that, all else being equal, such uncertainty would typically be offset by moderately looser interest rates, depending on the Fed's progress on its dual mandates of price stability and maximum employment. He also notes that tariff revenues contribute to national savings, which in turn influences interest rates. A reduction in these revenues could have implications for interest rate policy.

Dissent on Interest Rate Policy and Inflation Outlook

Myrin reveals his dissent in the last two policy meetings, advocating for a 50 basis point cut instead of the 25 basis points implemented by his colleagues. His primary motivation is to reach a neutral interest rate faster to avoid undue harm to the job market. He believes that current policy is too restrictive and that the Federal Reserve is moving too slowly.

He expresses a more sanguine outlook on inflation than many of his colleagues, particularly because he does not view tariffs as a significant driver of inflation. Furthermore, he anticipates shelter inflation to decline more rapidly than others do. Myrin argues that maintaining overly restrictive policy for an extended period carries increasing risks, as monetary policy operates with lags, and these lags could eventually impact the economy unfavorably.

Housing Sector and Sectoral Responses

Responding to a question about whether parts of the economy, like housing, are already in recession due to high interest rates, Myrin acknowledges that economic sectors will always exhibit varying degrees of strength and weakness. However, he reiterates that the Federal Reserve's mandate is to target maximum employment and stable prices for the economy as a whole, not to respond to distress in specific sectors. He warns that prolonged restrictive rates could, in fact, be the cause of a downturn in the labor market, which the Fed is tasked with avoiding.

December Rate Cut and Committee Divisions

Regarding the possibility of a December rate cut, Myrin refers to the Summary of Economic Projections from the September meeting, where the median forecast indicated a third cut for the year. He argues that since then, inflation has come in below expectations, and the labor market, based on alternative data, continues on its established trend. Therefore, he believes it would be consistent with the September projections to increase, rather than decrease, the odds of a December cut. He acknowledges that unforeseen events could alter this outlook.

Inflation Components and Imputed Services

Myrin elaborates on his view of inflation, particularly the recent CPI report showing a drop in housing inflation. He sees this as bolstering his case that shelter disinflation will be sufficient to offset higher inflation in other areas. However, he addresses the sideways movement in services inflation, specifically core services running closer to 4%. He explains that some of these services, like financial services (e.g., portfolio management fees), are "imputed services" in the Personal Consumption Expenditures (PCE) index. The BEA's calculation method can record increases in asset values, leading to higher fees for portfolio managers, as a price increase in inflation data, even if it reflects a quantity increase (more assets managed) rather than a true price hike. Myrin argues that monetary policy should not mechanically respond to such increases, which can be driven by factors like technological advancements (AI) or policy changes, rather than supply-demand imbalances. He notes that when these imputed services are excluded, market-based core services inflation is closer to 2-2.4%.

Inflation Threshold and Policy Adjustments

When asked about a "line in the sand" for inflation that would change his policy trajectory, Myrin emphasizes the critical role of shelter inflation due to its significant weight in inflation indices and its impact on people's cost of living and inflation expectations. He expects shelter inflation to continue its benign trend, aligning with market rents running at about 1%. However, he states that if new data indicated a resurgence in housing shortages and significantly higher rents, his entire forecast and policy outlook would need to be revised. He concludes that his current outlook is heavily dependent on this shelter inflation trend, and any significant deviation would necessitate a policy adjustment.