Fed Governor Miran on Why Inflation Fears Are Overstated

Oil moving higher now has very little inflationary consequence 12 to 18 months out. All the inflation happens up front. And so that's part of why a central bank should look through an oil shock as the Federal Reserve has historically done. Forward inflation expectations a year out, 2 years out, 3 years out are all pretty much unaffected by what's been going on. And in fact, a lot of them are lower since the FOMC met in January. My view is that the economy can bear additional support for the labor market from monetary policy. With the labor market very gradually cooling and declining wage pressures, you just are not going to get a wage price spiral that a central bank would normally respond to. When you sort of say something like running it hot, it's wildly imprecise because it's a statement that sort of assumes that supply is constant, that you can't increase the horsepower of the car. I don't think the economy needs monetary policy to be slamming on the gas and accelerating the economy like it was in 2021 or 2022, but I also don't think it needs to be holding the economy back. And right now it is modestly restrictive and it is holding the economy back and I don't think that's consistent with the macroeconomic backdrop. What matters when you think about shocks to the supply side whether they're AI, oil, regulation, no matter what the shock is, what matters when you think about this is

Thanks for having me. And let me just clarify that I'm one member of a board of seven governors. There are seven of us. I'm not a governor in the sense that I'm governor of the Bank of England or something like that.

Sure. Thanks. Look, at the Federal Reserve we have a dual mandate. We are tasked by Congress with paying attention to inflation, stable prices, and to the labor market. My view is that the inflation side of the mandate has, despite high measured inflation, not been so problematic because a lot of the inflation excess over target has been a result of some quirks of measurement of things like portfolio management services which is basically just the stock market going up biasing the way we measure inflation up by 30 to 40 basis points. Once you correct for those things I do not view inflation as being overly problematic whereas the labor market has been on a very gradual trend of weakening over the course of the last three years. That trend has been in place. It's been continual. You see it in increasing difficulty of finding jobs for new entrants to the labor market. You see it in increasing length of time that people spend between jobs during unemployment. And so my view is that the economy can bear additional support for the labor market from monetary policy. Now, a lot of what's been going on in the last few weeks has of course been tied to the war in Iran. And I think what's going on in oil prices has spooked a lot of people. And I understand from a trading perspective, from a markets perspective, things whip around wildly in both directions. You get headline ping pong and that pushes markets. And if you have levered positions, that can feel very intense. But from a monetary policy perspective, we have to make policy for 12 to 18 months from now because there are big lags with which monetary policy hits the economy. If we adjust interest rates, it doesn't feed through into actual economic growth, into actual unemployment and inflation for at least a year, right? So, we need to set policy for a year to a year and a half out. And the way that changes in oil prices affect the economy is actually much faster than that. When you get a spike up in oil prices, when you get a move higher in oil from something like what's going on in Iran, the oil price goes up immediately and headline inflation goes up a lot in the short term. But as you look a year to a year and a half out, it's very unlikely that that causes subsequent effects that are affecting the economy a year to a year and a half out, which is when monetary policy can affect the economy. And so that's part of why the classic reasoning of why a central bank should look through an oil shock as the Federal Reserve has historically done.

Yeah. So I'll say a couple things. One is when you think about how these negative supply shocks are hitting the economy, things like oil prices moving higher, as I said before it affects headline inflation very much in the short term but as you look further out it doesn't affect anything. And that is if you were to get concerned about these negative supply shocks that's what you would be looking for, you would be looking for a rise in inflation expectations further out in time. And if you look at the inflation swap market you see that forward inflation expectations a year out, two years out, three years out are all pretty much unaffected by what's been going on and in fact a lot of them are lower since the FOMC met in January. And so there's been zero bleedthrough of the negative supply shock of oil prices into inflation expectations further out in time which again is when monetary policy will be able to affect. The other thing you'd be concerned about is if there were a wage price spiral. If prices go higher and then wages go higher and that pushes prices higher again, you get a negative feedback loop that just creates a self-fulfilling inflationary spiral that requires tightening from the monetary authority to offset and to squash. That's not something that we see happening right now because the labor market, as I said before, has been on this very gradual cooling trend for about three years now, right? And with the labor market very gradually cooling and declining wage pressures, you just are not going to get a wage price spiral. That would be the type of thing that a central bank would normally respond to. Now, you said something else that I'd like to pick up on, which is that we've had a lot of negative supply shocks over time and I think that there's a tendency to think that those are the only supply shocks that we've experienced and that's not the case. There are also positive supply shocks that are hitting the economy too and these get a lot of attention too. So one of them is AI, right? AI is a positive supply shock. It increases the productive capacity of the economy. It lets people produce more with less inputs into production. That's a positive supply shock. Another very powerful positive supply shock that's been hitting the economy has been the trend in deregulation. Now I think this is a group of people who are focused on crypto. Regulations have probably played a large part in a number of your business models. And having to deal with those regulations has probably for a number of people in this room at some point slowed you down, reduced the amount of things you can produce, increased the cost of production. And as those regulatory barriers recede, it becomes easier for you to make products that people want to buy. And so as the regulatory backdrop becomes easier, that's a positive supply shock that hits the economy too. Now I gave a speech in January in Greece where I looked at the modern literature on regulation and it's very difficult to sort of quantify the federal regulatory code and turn that into a number in a way that economists would like to do rigorous empirical studies but I looked at the modern literature that sort of uses AI and machine learning tools to do so and I calculated that the deregulatory wave that's been hitting the economy over the last 15 months or so would ultimately drag on inflation by about half a percent a year for the next few years. Right? So that's quite chunky. Now just a couple of weeks ago, there was a new Federal Reserve staff research paper released by two staff economists at the Fed, Danilo Cascaldi-Garcia and Mateo Iacoviello. And what this Fed research paper on deregulation found is they did an entirely different estimation method than the previous literature and they did an entirely different measurement method for regulations than the previous literature. And when you apply their results to the scope of the deregulatory shock that we've seen over the last 15 months or so, it implies a roughly 0.3% drag on inflation each year for the next few years. Right? So that's not just a one-off effect. That's a persistent disinflationary effect from the receding regulatory backdrop. Now, using an entirely different literature, entirely different estimation methods, I calculated 0.5, they calculated 0.3. I think those are probably within noise of each other. They're certainly within confidence bands. I wouldn't be able to reject one in favor of the other, but either of them are very big and I think very substantial. And I think of the types of shocks that policymakers ought to take into account when we're thinking about the correct settings for monetary policy. So yes, it is the case that we have had a number of negative supply shocks hit the economy. Things like oil moving higher. But it's also the case that we have very powerful positive supply shocks hitting the economy too. And unlike oil, I expect some of these like deregulation and AI to be persistent in their disinflationary effects.

So in the last summary of projections because of the oil shock right that hits the economy very quickly whereas I think some of these other shocks play out over time I did raise my inflation projection for my headline inflation projection for this year to 2.7%. Right? So I moved it a little bit higher because of the oil shock. However, as I said before, this is not the type of thing that policy should respond to because that happens all up front and policy affects the economy 12 to 18 months out. Oil moving higher now has very little inflationary consequence 12 to 18 months out. All the inflation happens up front. What does happen 12 to 18 months out is the economy might be weaker because every dollar that people put into filling their gas tanks is a dollar they're not spending on other goods and services. And so that might put upward pressure on the unemployment rate. So in the March summary of economic projections, I boosted my policy rate by half a percent not due to oil and Iran, but due to the inflation data that we received in between the December summary of projections and the March summary of projections, that puts my projection at about neutral, right? So the neutral policy rate is the monetary policy interest rate that's neither stimulative nor accommodative. Right now I think that's probably about 2.5% to 2.75%. We're about a percentage point above that level right now. I think it's appropriate over the course of this year to just get back to neutral. I don't think the economy needs monetary policy to be slamming on the gas and accelerating the economy like it was in 2021 or 2022. But I also don't think it needs to be holding the economy back and right now it is modestly restrictive and it is holding the economy back and I don't think that's consistent with the macroeconomic backdrop.

Yeah. So look, I think that the AI productivity boom does unambiguously push the neutral rate higher. However, I think there's a lot of other counterveailing factors that have been weighing on the neutral rate. And so it is the case that if investing becomes more profitable over time, if investing becomes more productive over time, that raises the long-term neutral rate of interest that you get on capital on investing and that boosts neutral. But there's other things that have been weighing on it. And one thing that I've been trying to draw attention to that's been weighing on it, I think quite powerfully is the change in population growth. We lived through the biggest shocks to the population growth rate in both directions in certainly in my lifetime, probably in the lifetimes of many folks in this room, within the course of a few years, right? We had a period of massively growing population in 2021 to 2023 or so. And then in 2024 to 2026, that population growth plummeted pretty much to, working age population growth is probably pretty close to flat now. And so that was a huge spike up in growth and then a huge spike down. And just as the neutral interest rate is a function of the equilibrium returns in capital that are affected by productivity, it's also affected by the growth rate in the economy which is affected by population growth. And so that in my view is a very big thing weighing on interest rates. And you see that across the world. We spent many years before the pandemic discussing Japanization of global interest rates, declining fertility rates, aging populations around the world, declining population growth led to lower interest rates in a lot of countries. And there was a lot of time spent discussing is everybody going in this direction, right? I think that those channels, those pathways were always valid economic pathways and maybe they were of primary importance sort of before the pandemic and a lot of people were talking about them and then during the pandemic a lot of other things started to matter mostly related to the pandemic and then the massive economic support programs that were launched after that. But the connection between population aging, demographic growth, and interest rates didn't go away, right? It just, other things occupy our attention, but those pathways are still valid. And I think that we'll see in coming years that they matter again because of the size of the shocks that we've experienced to population growth. Another thing that I think weighs on the interest rate is the improving fiscal deficit. And so I think that if you look at the fiscal deficit in Q2 through Q4 of last year versus the fiscal deficit of Q2 through Q4 of the previous year. And of course I think the major delta is tariffs, it's not all tariffs but the biggest delta is tariffs. The fiscal deficit came in quite a bit. I think at an annualized rate it's probably about 450 billion but that's off the top of my head so that might not be correct. It's a significant decline if you look at Q2 through Q4 of 2025 versus Q2 through Q4 of 2024 and I think the major delta is tariffs right so that decline in fiscal borrowing is something that pushes around the neutral rate too and that is something that I think will also weigh on it so my view of the neutral rate is towards the bottom of the range of where my colleagues view is if you look at the SEP but I'm not outside of the range.