Fed’s Miran on Supply Shocks, Policy, Central Bank Tenure

Sure. This has actually been one of the biggest surprises, you know, given all the drama at the beginning. I've been perceived internally, I think very, very politely, very cordially and very kindly. And I think folks have largely enjoyed some of the intellectual conversations, some of the challenges that I've leveled against some of the ways that there had been thinking beforehand. And I think that the overall response has been, you know, very welcoming and very kind. And that's one of the things that I'm most grateful for.

Yeah, sure. So one example of one of those things is the importance of regulations for determining the supply side of the economy. I mean, we spend a lot of time, you know, out in the financial world, out in policy, discussing the effects of a 33 versus 35% marginal tax rate. But the truth is that regulations are often infinite. Taxes and being told you're not allowed to do something versus you are allowed to do something is a very, very strong difference. And this had played a very small role in a lot of the modeling discussions happening at the Fed, and a lot of the outlooks that I sought out that I heard people present. And I came in and really hammered that idea and I think sort of moved it forward. And now a lot of people talk about it very often internally and externally and, you know, sort of talk a lot about supply shocks. This is a positive supply shock that is unfolding and continues to unfold and will, I hope, mitigate some of the negative supply shocks.

Yeah. So I think this is a really subtle issue with a lot of moving parts. Now, at a very high level, what I would say historically is that we've seen a lot of countries in different places have declines in population growth rates and stagnant populations or shrinking populations. And I think the cross-country and historical evidence is that it's unambiguously disinflationary or even eventually deflationary. There's a few ways that that works. One is by reducing the, sorry, there's a few consequences of lower population growth. One is it does reduce the break-even payroll growth rate. So the number of jobs you need to create every month to hold the unemployment rate constant, that does come down. That's a mildly hawkish implication because it means you shouldn't get so concerned about very, very low job creation rates. However, there's also dovish implications as well which are that it lowers the neutral rate. It brings interest rates down over time. And we've sort of seen that across countries and historically to be the case. And it's also disinflationary through long-lived capital and consumer goods. And if you think about something like housing, right, the supply of houses is relatively fixed in the short run. And if you throw millions of new people into an economy, you're going to drive up the price of rents because they need places to live. Right. You're going to create inflation and that inflation is very, very persistent because of the way that housing inflation is calculated. It's very, very sticky. If you have declining population growth, you don't need as much home price growth. And that very inflationary tailwind gets taken away and ceases to be a major driver of inflation. And I think you sort of, you've been seeing that start to play out in the data. Market rents in this country have been growing at a 1% rate for the last few years. This is one of the biggest components of the inflation indices. And I think you're going to continue seeing measured PCE and CPI rents and measured PCE and CPI shelter inflation continue to converge down to those very low levels. So I think there's one hawkish implication which is the lower break-even rate. But there's also some very dovish implications because it reduces the neutral rate and it brings down inflation through some of these long-lived capital and investment goods.

I do, and I think this is maybe one of the biggest differences between me and a lot of other folks is that I take very seriously the idea of monetary policy lags, very, very seriously. Monetary policy doesn't hit the economy right now. If we changed interest rates today, it wouldn't flow through into the economy until 12 to 18 months from now. Right now, there's some disagreement over exactly how long those lags are, but I think 12 to 18 is the consensus view. And therefore for any shock that's hitting the economy today, you can't think about what the effect in the next few months is. You need to think about what the effect in the next 12 to 18 months is, and the effect 12 to 18 months out. So if oil goes higher, it's a supply shock. Straits of Hormuz are closed. Right. That's going to boost the oil price today. And with it, a bunch of other stuff that's very tightly tied to energy prices like airfares. Right. That's going to go higher very quickly within the course of a few months. And we've been living through that. And that is very real, right. There's no way that that is very real inflation, but it is not inflation that monetary policy can affect. Monetary policy can affect 12 to 18 months from now. So there's got to be a reason that you think airfares and oil prices are going to be moving higher in the summer of 2027 and the fall of 2027, not the summer and fall of 2026. And so it's those lags that really should be driving where you think about forward-looking monetary policy should be. And that's a lot of what I've tried to hone into when thinking about population growth and deregulation, and saying that the traditional view that we should look through an oil shock should prevail. This is very, you know, vanilla basic sort of traditional monetary policy.

So let me address those separately. So the market not agreeing is in part a hall of mirrors issue. Because if the Fed says we're very backward-looking and inflation over the last 12 months is going to determine policy that affects 12 to 18 months from now, meaning, you know, the economy in 2027 is affected by data in 2025, in that world, right, so very, very backward-looking. If that's how the Fed communicates that it's setting policy, then the market is going to start to reflect that. And so the market reflecting a lack of interest rate cuts, right, is in part because the Fed is telling them we're backward-looking. Right. And so that's going to create a self-reinforcing problem. Now, on the Fed-Treasury accord, you know, so first of all, you know, I won't be involved in that if it happens. But, you know, I have done some work on the balance sheet. And I do think it is important that one of the problems with having a very large balance sheet and lots of securities, lots of Treasury securities on the Federal Reserve balance sheet is it does start to get the Fed involved in questions that have some fiscal implications, right. If we own a huge chunk of debt, then that means that we're impinging on decisions that traditionally are the realm of the fiscal authority of what is the distribution of public debt that it issues that's held by the public. And so I do think it is important that if you have a large balance sheet, there needs to be certain, some clear delineation about who's doing what. And to me, these questions are really murky. And they, you know, they implicate independence to an extent. And therefore it's one of the reasons among many that I would favor having a smaller balance sheet.

Yes. So my view is that the Fed having a big balance sheet starts to implicate a lot of those lines and becomes problematic. So the Fed should strive to have as small a balance sheet as it can to achieve its goals and implementation framework. And if we can sort of improve that implementation framework and make it smarter to reduce the minimum size of the balance sheet that we need, then that's a great thing. And that was a major thrust of the paper that I wrote in the spring with Alessandra Barone and Anthony Dirks and Alyssa Anderson. And so that was a major thrust of that work. That was really important. Now in terms of coordinating, right, the Fed should do what it should do for monetary policy, and the Treasury should do what it should do in terms of fiscal policy and the level of coordination should, I think, be, you know, sort of separate, right? They should be doing what they want to do for each of their own priorities. However, there are times when there is going to have to be that type of coordination. So for example, you know, right now we're doing these reserve management purchases where we're expanding our balance sheet to sort of provide a minimum level of reserves into the economy to meet reserve demand. We're buying Treasury bills. We're letting mortgages continue to mature off of our balance sheet and replace them with Treasury bills. Right. Like in theory, if we did enough sort of conversion of our existing balance sheet into Treasury bills, we might be absorbing all of the supply. Right. And then some. So this is an example of a time where there would have to be very tight coordination.

Yeah. So I spoke to the president when I went to go resign from the Council of Economic Advisers, I went to bring my resignation letter. But, you know, he doesn't tell me anything. He doesn't tell the whole world, right? This president is very forthright with his views. And he tells journalists all the time, including Bloomberg journalists, exactly what's on his mind about policy and where it should be. So no, I'm not in receipt of any information that's not public.

Well, thank you. Thank you for those words. I do think it's clear that I've disagreed with lots of people on policy. And there have been times when there have been signals out of the White House that they wanted policy rates lower than I had my doubts. And there have been times when there's been signals out of the White House where they thought that I was too hawkish. Right. So, for example, the NSC director, after my first vote, said that he would have preferred a 25 basis point cut. Right. So I clearly do my own thing and have my views. And they're all, I think, grounded in very traditional economics. And we were talking about population growth before. Like this is not new, right? Like six years ago we were already talking about is everybody becoming Japan. You know, that would have come up several times a week, right? Like none of this is new. None of this is heterodox economics. None of this sort of says we need to just discard with the entire framework. It's all within the traditional framework. And this is part of why I think the reception internally has been generally pretty good is because I'm engaging with folks on their ground. Right. Like, I'm within the world of normal economics, and we're talking about what drives the interest rate, and does population growth drive the neutral interest rate? And is it inflationary or disinflationary? This is all well within the normal.

Yeah. So I think one thing that's important to understand is that people at the Fed are responsive to arguments. And as I said before, you know, I've been hammering deregulation, among other things, since the day I got there. And, you know, they start to respond. But it takes time, right? You know, it's a bit of a slow-moving process.

Well, you know, I don't know about that. You know, certainly, Chairman Powell built a lot of the institutions and processes that exist there. And so, you know, that dynamic may play into it, I don't know. But that'll be an issue for Chairman Warsh to deal with.

No, he didn't tell me ahead of time that that was his plan. But he'd always said that, you know, publicly and privately was something he might do. And so it wasn't entirely a surprise.

You know, look, my reaction to that is that when I was the incoming chairman of the Council of Economic Advisers last year, I was very grateful to the previous chairman, Jared Bernstein, for spending time with me on the phone, being very generous with his time. Several hours over days and weeks, giving me advice for how to be a good senior chairman. And I really appreciated that and sort of how does the place run and what are your responsibilities and how do you do a good job? And I thought that was really generous of him, and I was really appreciative of that. And then I went out of my way to make sure that they very quickly put his portrait on the wall. The former chairman in the offices in the Eisenhower Building. You know, just to make sure that happened quickly, without delay. And I was really grateful. So look, transitions are important. And I think that, you know, it is maybe helpful to have someone there to give advice. Here's how to be an effective chairman. Here's how to lead the committee. Here's how the building works. It may be a little bit different than it was 20 years ago, right? I think that can be helpful, but I still think it's important that it be a transition because you want to have people's loyalties undivided. You want to have there be very clearly one chairman. You want to have a place where there's no question about who's in charge. And there was no talk of rival factions and things being split. I think you want to have a sense of unanimity and clarity. And so transitions are important. I think it can be helpful to have help in transition, but I still think it's important that it is a transition.