Federal Reserve Governor Michelle Bowman: Neutral interest rate expected to be 2.5%, should lower interest rates by another 125bp this year, may still vote against

On Monday local time, Federal Reserve Governor Stephen Miran stated in a written speech at an event of the Economic Club of New York that current interest rates are too high and proposed a significant rate cut in the coming months to protect the U.S. labor market.

This was Miran's first policy speech since being sworn in as a Federal Reserve Governor last week. In his remarks, he explained the reasons why the neutral interest rate, which neither stimulates nor suppresses economic growth, has declined. Miran pointed out:

The neutral interest rate may have been overestimated in the past and has recently been further depressed by tariffs, immigration restrictions, and tax policies. The significant reduction in the number of immigrants, tariff revenues, and the economic growth brought about by this year's tax legislation all exert downward pressure on the neutral interest rate.

In my view, the strong downward pressure on the neutral interest rate from changes in border and fiscal policies has not been fully considered, leading some to mistakenly believe that the current level of monetary policy tightening is not as high as it actually is.

Certain policies, such as deregulation, may raise the neutral interest rate, but fiscal policy could significantly lower the neutral interest rate.

Miran also incorporated market-based interest rate measures into his forecasts.

Miran's estimate of the neutral interest rate is about 2.5%, significantly lower than the median forecast of 3% from Federal Reserve officials. However, several other officials also expect the neutral interest rate to be below 3%. Nevertheless, Miran is the only one calling for a rapid drop to this level.

Based on his judgment of the neutral interest rate, Miran believes this means that interest rates should be significantly lowered to avoid economic damage. The result is that monetary policy is clearly in a tightening range. Keeping short-term rates about 2 percentage points above the appropriate level would lead to unnecessary layoffs and higher unemployment rates.

The Federal Reserve lowered interest rates by a quarter percentage point to a range of 4% to 4.25% at the September FOMC meeting, the first reduction since last December. Miran opposed the 0.25 percentage point cut at the September meeting, instead supporting a doubling of the cut to half a percentage point. He was the only one to cast a dissenting vote in September.

Miran stated last Friday that he hopes to see a further 1.25 percentage point cut in the remaining two FOMC meetings this year. In contrast, the median interest rate forecast from the 19 Federal Reserve officials only indicates a further half percentage point cut in the remaining two FOMC meetings this year.

While some of Miran's colleagues at the Federal Reserve are concerned that inflation has not yet fallen to the Fed's 2% target, Miran downplayed concerns about price pressures from tariffs in a television interview on Friday.

Miran also stated on Monday that he might support the elimination of the Fed's precise 2% inflation target, noting that inflation itself is difficult to measure. However, he emphasized that such an adjustment must occur after the Fed achieves that target and maintains it for a period of time to avoid giving the impression that the Fed can change its targets at will.

Miran previously served as the chairman of the White House Council of Economic Advisers and is currently on unpaid leave from that position during his tenure at the Federal Reserve. His term as a Federal Reserve Governor will expire at the end of January next year.

During the Q&A session following Miran's speech on Monday, when asked about seeking a significant rate cut, he said, "This is not panic. Panic measures would be a cut of 75 basis points or more. I am not panicking; I just believe that when you maintain a level significantly above neutral for a long time, the risks continue to rise." Milan added that he may continue to vote against at future Federal Reserve meetings. "I will maintain this position until my viewpoint changes. If that means continuing to vote against, then I will continue to vote against. I will not support policies I do not agree with just to create a false appearance of consensus."

Media commentary noted that the Federal Reserve decision-maker recently appointed by President Trump articulated his reasons for advocating significant interest rate cuts on Monday, a position that aligns with Trump's demands but appears particularly independent within the Federal Reserve.

The initial reaction from the outside to Milan's remarks was skeptical. They find it hard to believe that the current Federal Reserve policy is even slightly tightening. Currently, the financial environment remains loose, and the job market is close to full employment, both of which do not support the notion of highly restrictive interest rates