New Voices at the Fed
Recently installed Fed governor Stephen Miran outlined his case for why he believes interest rates should fall significantly from current levels. While this perspective is outside the centrist perspective held by most Fed governors, there is a clear bias towards easing rates.
We believe the Federal Reserve will cut rates at least one additional time this year and that will affect investment strategy, particularly in cash bearing accounts. We will see falling rates on savings instruments, which will make dividend stocks appear more attractive. Lower rates tend to also push investors towards equity-related positions.
We have adjusted our strategies based on our belief rates will fall. And unfortunately, we still do believe there’s a reason chance stagflation is right around the corner. We are watching that carefully.
A recent CNBC article highlighted the new Fed governor’s comments:
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“Less than a week after taking his seat, Federal Reserve Governor Stephen Miran on Monday outlined the reasons why he thinks the central bank’s benchmark interest rate is far too high and should be lowered aggressively.
Changes in tax and immigration policy along with easing rental costs, deregulation and incoming revenue for tariffs are creating a different economic landscape that allow the Fed to cut its benchmark rate by nearly 2 percentage points from its current level, the central banker said in remarks before the Economic Club of New York.
“The Federal Reserve has been entrusted with the important goal of promoting price stability for the good of all American households and businesses, and I am committed to bringing inflation sustainably back to 2 percent,” he said. “However, leaving policy restrictive by such a large degree brings significant risks for the Fed’s employment mandate.”
Miran sees the confluence of policy changes from the White House lowering the neutral level of interest that neither restricts nor promotes growth. In remarks heavy with data and citations on theory and interest rate models such as the Taylor Rule, Miran said current monetary policy is significantly more restrictive than the prevailing attitude among his fellow policymakers.
Using standard policy rules, Miran thinks the federal funds rate, a level that banks charge each other for overnight lending but that influences a wide variety of other rates, should be in the low-2% area. The current funds rate following last week’s reduction is targeted between 4%-4.25%.
“The upshot is that monetary policy is well into restrictive territory,” he said. “Leaving short-term interest rates roughly 2 percentage points too tight risks unnecessary layoffs and higher unemployment.”
The views, however, put Miran well outside consensus on the Federal Open Market Committee, where the current approach advocates more caution and a tepid move lower in rates over the next several years.”
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