Miran Says Rates Are Too High: Politics or Reality?

Some political commentators believe Stephen Miran is a pawn of President Trump, aiming solely to lower interest rates, regardless of whether such action is justified. But, regardless of your political views, set aside your own perspectives for a moment and consider Miran’s views on the economy and monetary policy.

Although we disagree with his assessment of how much the Fed should cut rates, he provides valid reasons why the fed funds rate remains too high.

Miran’s Theme

On September 22, 2025, shortly after the FOMC meeting, Miran gave a speech to the Economic Club of New York. This article reviews that speech, which addresses his rationale for a significantly lower fed funds rate.

Miran’s case is founded on the Taylor Rule. The Taylor Rule, developed in the early 1990s by John Taylor, aims to quantify the optimal federal funds rate. The formula comprises three components: inflation, r*, and the economy’s output gap.

Inflation: Is it running above or below the Fed target of 2%?

R*: The neutral interest rate that balances the economy. More simply, it’s the rate of fed funds that is neither too restrictive nor too accommodative. For more on the neutral rate, aka r*, please read my article Interest Rates Are Too High – Blame The Mythical R Star.

The Output Gap: The difference between what the economy is currently producing and its maximum potential at full capacity.

Let's summarize his opinions on the three Taylor Rule components to appreciate why he thinks rates should be markedly lower. Below each of the three sections, we share his calculation for how recent policy changes and ongoing trends impact the neutral Fed Funds rate.

Inflation

As we have stated on numerous occasions, shelter costs (rent and imputed rent) — which are significant contributors to CPI and PCE — lag real-time data. Miran agrees with us, believing that current inflation readings are nearly half a percentage point too high. Supporting Miran’s argument is the Cleveland Fed’s New Tenant Rent Index.

The New Tenant Rent Index is one of the most reliable forward indicators for U.S. housing inflation, because it measures only newly signed leases, rather than lease prices from contracts signed months or even years earlier, as the CPI and PCE calculations do. This narrower focus on current rental prices makes it much more responsive to market changes. As a result, it has historically led the official shelter inflation readings by nine to 12 months.

The graph below shows the New Tenant Rent Index peaked in 2022, and true to form, it was followed a year later by the peak in the CPI Shelter Index.

Today’s 8.87% year-over-year decline is one of the steepest declines in the series' history. It's occurring due to a record wave of multifamily completions in 2024–2025 and limited demand growth, in part because of changes to immigration policies.

The takeaway per Miran:

Rents for all tenants will fall toward this low rate as people moving or renewing leases sign at current market rates, and I expect CPI rent inflation will decline from its current level of roughly 3.5 percent to below 1.5 percent in 2027. This implies a roughly 0.3 percentage point decline in total PCE inflation; by early 2028, I expect that effect to grow to a 0.4 percentage point decline. Per a Taylor rule, that works out to an appropriate fed funds rate roughly half a percentage point lower than current shelter inflation would imply.

Miran adds that new immigration policies will further reduce demand, and in his opinion, this implies an additional 1 percent lower rent inflation per year.

Net Impact: -47 to -60 basis points.

R*

To reiterate, R-star, or the neutral rate, is the interest rate that balances the economy. More simply, it’s the rate of fed funds that is neither too restrictive nor too accommodative. *.

Miran cites four reasons that the r*, or neutral rates, are likely to continue trending lower. They are:

Population Growth: Population trends are a major factor influencing r*. The U.S. baby boomer generation is retiring in large numbers, leading to a shift from spending to saving. This results in a greater supply of loanable funds and a lower demand for loans, which in turn decreases the interest rate needed to balance the market.

Furthermore, new immigration policies are expected to halve the U.S. population growth in the future. Per Miran:

Based on estimates from both Weiske and Ho, a 1 percentage point drop in annual population growth can reduce r* by 0.6 percentage point. So, the expected decline in U.S. population growth equates to a nearly 0.4 percentage point drop in the neutral fed funds rate.

Increased National Savings Due to Trade Policies: Miran states that the CBO estimates annual fiscal deficits could decrease by $380 billion due to tariff receipts. As a result, the demand for loans from the U.S. Treasury will drop, changing the supply/demand balance of loanable funds. Per Miran:

A 1 percentage point change in the deficit-to-GDP (gross domestic product) ratio moves r* by nearly four tenths of a percentage point, according to the average of estimates summarized by Rachel and Summers. This 1.3 percent of GDP change in national saving reduces the neutral rate by half a percentage point (over the next ten years).

Increased Economic Growth Due to Tax Policies: Miran believes that recently enacted tax laws will generate investment. To wit:

This should be associated with an increase in r*, and thus the appropriate fed funds rate, of around three-tenths of a point.

Effect of Deregulation and Energy: Miran views regulation as an economic tax that “hinders productivity growth, restricts productivity, and ultimately helps fuel inflation.” Thus, he believes that recent deregulatory polices and a more pro-energy stance (drill baby drill) will boost total factor productivity (TFP), thus economic growth. The impact per Miran:

The cumulative effect of these policies is anywhere from a 3 to nearly 9 percent increase in TFP, translating to about a 0.1 to 0.2 percentage point increase in r*

Net Impact of the four components of r*: -100 to -120 basis points

R* Trends

For context, I share the following from my article Interest Rates Are Too High – Blame The Mythical R Star.

The first graph below, courtesy of the New York Fed, shows two similar R Star models the Fed relies upon. The second graph charts them together with their trend lines.

As you can see, the two model rates fluctuate, but both have a decidedly lower trend. The Laubach-Williams model (blue) shows that the R Star is 1.18%, while the Holston-Laubach-Williams model (orange) is 0.70%. Assuming the Fed’s 2% target rate is the “stable inflation rate,” the models would argue an appropriate fed funds rate is between 2.70% and 3.18%. Currently, the rate is 5.25%-5.50%.

Also noteworthy is that the trend lines imply that the R Star will decline by roughly 0.06% yearly.

The Output Gap

As a result of the new tax policy, there will be a decrease in government revenue and spending. Although the reduction in spending is larger and may hinder economic activity, economic theory indicates the benefits of reducing taxes are considerably greater than those of government spending. In economic terms, government spending has a negative multiplier effect, meaning it ultimately slows economic growth. Conversely, private sector investment has a positive multiplier, thereby promoting economic growth.

Thus, net-net, changes in tax policy should marginally increase the neutral Federal Funds rate.

Per Miran:

Relative to a pretax law policy baseline, CEA calculations using Congressional Budget Office estimates found a static $80 billion or so reduction in revenue and a $130 billion or so reduction in annual spending over a decade. Despite a greater reduction in spending than taxes, the literature consistently finds the tax multiplier to be larger than the spending multiplier.23 This implies an increase of actual output over potential of approximately $50 billion in the short run, or an increase in the output gap of nearly 0.2 percent of GDP. This translates into an increase in the appropriate federal funds rate of around 0.1 percentage point under the standard approach to the Taylor rule. The balanced-approach rule, which doubles the weight on the output gap and was favored by former Chairwoman Janet Yellen, would imply a 0.2 percentage point increase.

Miran’s Summary

Miran summarizes his argument using the table below. The top line indicates the Taylor Rule recommends the fed funds should be at 4.26%. Janet Yellen’s preferred Balanced Approach Taylor Rule is slightly lower, at 3.96%. Solely based on these models, Miran argues that the current fed funds rate, which ranges from 4.00% to 4.25%, is appropriate.

Where he differs is with the “shocks” or changes to policies enacted by President Trump. Miran factors these in the columns titled “Same under Both Rules.” The net changes due to inflation (-0.47% to -0.60%) and the net changes due to a lower r* (-1.00% to -1.20%) should decrease the Fed Funds rate by between 1.47% and 1.80% to approximately 2.00% to 2.50%.

Per Miran:

Including the inflation and output channels along with the median model-implied r*, the fed funds rate should be around 2 to 2.25 percent under the standard Taylor rule approach. The balanced approach implies a rate around 1.5 to 2 percent.

Summary

I tend to agree with Miran’s broad takeaway that the Fed Funds rate is too high. I also think he makes a good case for the Fed to lower rates over the next few meetings. However, I don’t think that rates should be as low as Miran recommends, given that inflation remains sticky above the Fed's 2% target and economic growth is close to trend growth.

If the labor market continues to weaken and inflation moderates, Miran’s suggestion of a fed funds rate around 2% would have more merit with me.

I end with a few salient direct quotes from a Bloomberg article, titled “Questionable, Incomplete”: Wall Street Rejects Miran’s Fed Call:

• “We find some of his arguments questionable, others incomplete and almost none persuasive,” JPMorgan Chase & Co.’s Michael Feroli wrote in a note to clients.
• “With inflation running above target for more than four years, and consensus pointing to still-high inflation and modest unemployment in the years ahead, the burden of proof in arguing for extreme easing lies with Miran.”
• Carl Weinberg, chief economist at High Frequency Economics, said in a note after Friday’s data: “Indeed, there is no recommendation in these numbers for any easing of monetary conditions at all!”
• Not all economists totally cast aside Miran’s view. Neil Dutta, head of economics at Renaissance Macro Research, said the neutral rate is probably slightly lower than the Fed thinks, and therefore, policy is restrictive. But he doubts neutral is as low as Miran says.
• “If real neutral rates were zero, as he claims, the economy and financial markets would have already collapsed,” Dutta said in an email after Miran’s Monday speech. “It’s tough to reconcile an economic Golden Age with a neutral rate of zero.”

Michael Lebowitz is a portfolio manager with RIA Advisors and author for Real Investment Advice. For more information, contact him at [email protected] or 301.466.1204.

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