- Key insight: Federal Reserve Gov. Stephen Miran says monetary policy is “too restrictive” and that the central bank should cut rates quickly.
- Supporting data: Miran cited slower population growth due to deportations and “declining deficits” as forces pulling the neutral rate lower than has been widely appreciated by policymakers.
- Forward look: Miran warned that continuing on the current trajectory of slow, deliberate cuts raises the risk that the labor market will continue to deteriorate, triggering a recession.
NEW YORK — Federal Reserve Gov. Stephen Miran Thursday evening reiterated his view that monetary policy is too restrictive, emphasizing that the central bank should cut rates quickly to bring it down to a more neutral stance.
“There’s no point in getting to neutral slowly,” Miran said in a fireside chat with members of the American Investment Council as part of their General Counsel Day.
Miran pointed to two structural shifts driving this secular reduction in neutral rates: a slowdown in population growth driven by “the change in border policy,” which he said mirrors how “in a country like Japan where they have low population growth, you see interest rates go down,” and the impact of “declining deficits.” Taken together, he said, those forces have driven down the neutral rate from what it might otherwise be, and delaying corrective action could undermine the credibility of the Fed’s monetary policy.
“The longer you stay restrictive,” Miran said. “The greater the odds that monetary policy itself causes an unwanted weakening of the economy and unwanted weakening of the labor market, or recession.”
On bank regulation, Miran said financial stability and banks’ ability to lend are equal “sides of the ledger,” arguing that stability should not outweigh the health and profitability of the businesses that provide credit. He urged regulators to think holistically about the second-order economic effects of supervision on lending and the broader economy.
“We need to think about … the regulations we’re putting into place,” Miran said. “They may achieve a marginal gain in banking stability, but then what’s the marginal cost of credit availability to the economy? If one’s disproportionate to the other, then the regulation may make sense or may not make sense.”
Miran noted that the regulatory arbitrage between the regulated banking sector and nonbanks has at least been a contributing factor in the growth of private credit in recent years, Miran said.
“It has been a form of regulatory arbitrage where you made the type of lending in the banking sector onerous and expensive, and so therefore it migrated to where it’s not onerous and expensive,” Miran said. “[Regualtors] shouldn’t be the ones dictating where lending is happening. It should be happening for market purposes because borrowers and lenders find it more attractive to transact in this form instead of that form.”
Miran said concerns about the rapid growth of private credit could be assuaged if there was more transparency into those businesses for policymakers and the market.
“I hear a lot of people being concerned about private credit,” Miran said. “I think that one reason why they may be concerned is because there’s less data available [for private credit firms] than there are for other forms of credit. My advice to the private credit folks would be, make more data … that’s not necessarily [to say,] make things publicly traded, but just data about what’s out there is the type of thing that would assuage some concerns that some people have.”