Federal Reserve Governor Stephen Miran made waves during recent public remarks by arguing that current monetary policy remains “quite a ways” above neutral rates, despite strong financial market conditions that might suggest otherwise. His analysis challenges conventional views about where policy should stand and raises critical questions about hidden economic stresses.
The Core Argument: Passive Tightening Through 2024
Miran presented a fascinating framework during his statements following the Fed’s latest meeting. His central thesis: monetary policy has effectively tightened throughout 2024 without the Fed changing rates at all.
The mechanism behind this passive tightening comes down to shifts in the neutral rate—the theoretical interest rate level that neither stimulates nor restricts economic growth. According to Miran’s analysis, several major economic shocks have pushed the neutral rate significantly lower this year, meaning that even if the Fed holds rates steady, policy becomes progressively more restrictive over time.
“What matters for the stance of policy is where you are relative to the neutral rate,” Miran explained in his remarks. When neutral rates decline but the Fed funds rate stays constant, the gap between them widens, making policy effectively tighter without any explicit Fed action.
Population Shocks Driving Neutral Rate Changes
What’s particularly noteworthy about Miran’s framework is his identification of population growth as a primary driver. The data here is striking: the U.S. experienced roughly 30 years’ worth of population growth changes compressed into just three years, with rates moving dramatically in both directions.
Population growth rates typically move glacially, making them a stable component of neutral rate calculations. When this variable suddenly becomes volatile, it introduces unusual dynamics into monetary policy. Miran argues that rapid population changes pushed neutral rates higher in 2023 before reversing course in 2024, creating the passive tightening effect he’s concerned about.
The implications matter because monetary policy operates with “long and variable lags.” Even if the economy appears healthy today, maintaining overly restrictive policy for extended periods increases the risk that these delayed effects eventually manifest as an economic downturn.
Financial Conditions: The Housing Market Signal
One of the more contentious debates at the Fed revolves around interpreting financial conditions. Kansas City Fed President Jeffrey Schmid noted during the meeting that policy appears “only modestly restrictive” and that “financial market conditions appear to be easy across many metrics.”
Miran pushed back on this characterization, arguing that observers are focusing on the wrong metrics. Stock market strength and tight credit spreads don’t tell the full story about how monetary policy affects the real economy.
“The stock market and credit spreads matter. They matter a lot. But then you sort of think about something like housing. I think housing matters a lot more for the cyclical position of the economy,” Miran stated.
Looking at housing-related financial conditions reveals a much tighter picture. Mortgage rates remain elevated, home affordability is stretched, and housing activity has slowed considerably. For assessing the economy’s cyclical position, these housing indicators carry more weight than equity valuations driven partly by AI enthusiasm and technological optimism.
The Private Credit Warning Signal
Miran also highlighted developments in private credit markets as potential evidence that policy is more restrictive than surface-level indicators suggest. Private credit has grown substantially as a share of total credit extended to the economy in recent years, yet these markets lack the regular price discovery of public markets.
“I wonder if what we’re seeing now in some of the distresses that you see in private markets means that financial conditions have actually been tighter, but it’s been masked by the fact that we don’t get marks for those on a regular basis,” Miran noted.
When seemingly unrelated credit problems begin emerging across different areas, it can signal that monetary policy has been restrictive for long enough that strains are starting to surface. While these issues may appear idiosyncratic individually, their collective appearance often indicates broader policy tightness working its way through the system.
The Case for 50 Basis Point Cuts
Based on this analysis, Miran dissented at both recent Fed meetings, advocating for 50 basis point rate cuts rather than the 25 basis point moves the committee ultimately chose. His reasoning: the Fed needs to close the gap between current policy and neutral rates more quickly to avoid the risk that accumulated policy restriction eventually triggers an economic downturn.
Importantly, Miran isn’t calling for emergency action. He emphasized that the economy isn’t dysfunctional and financial markets are operating normally. Rather, he sees the current situation as one where policy is simply tighter than necessary given his more optimistic inflation outlook.
“I don’t think it’s the case that we need to get there [to neutral] even faster than that, because I don’t think the economy is dysfunctional right now,” Miran clarified when asked why he didn’t push for even larger 75 basis point cuts.
Data Dependency Versus Forward-Looking Policy
An interesting wrinkle in the current environment is the ongoing government shutdown limiting access to official economic data. Miran addressed this by arguing that policymakers should be forward-looking rather than excessively data-dependent anyway.
His confidence in his forecast stems from the identifiable nature of the shocks affecting the economy. Population growth changes are quantifiable, and their impact on neutral rates can be estimated with reasonable precision. This gives him confidence to maintain his policy views even amid temporary data gaps.
For tracking inflation developments, Miran noted he would rely on housing market signals reported by financial media and alternative data sources. On the labor market, alternative data continues to show ebbing demand consistent with overly tight policy—declining hiring without the wage pressures or worker scarcity you’d expect if supply-side immigration factors were driving the slowdown.
What This Means for Markets and Investors
Miran’s dissent matters because it represents a significant voice on the Federal Open Market Committee arguing that policy risks erring on the side of excessive restriction. If his analysis of neutral rates proves correct, the Fed may need to cut more aggressively than markets currently expect to avoid undermining economic growth.
The key variables to watch going forward include housing market indicators, private credit market developments, and labor market data showing whether demand continues weakening. If these signals align with Miran’s framework, pressure will build for the Fed to accelerate its cutting cycle.
For now, the committee appears willing to proceed cautiously with 25 basis point moves. Whether Miran’s dissenting voice gains more traction likely depends on how the economic data evolves in coming months—and whether hidden stresses in areas like private credit begin emerging more visibly.