Federal Reserve Governor Stephen Miran delivered a warning in his September 22, 2025 speech: U.S. monetary policy is too restrictive, and the cost of maintaining such tightness could be significant job losses. For months, the Fed has justified high rates as necessary to tame inflation, but Miran argues that policymakers are misreading the landscape. Structural, non-monetary forces have shifted the economy’s equilibrium, lowering the “neutral rate” of interest. If the Fed fails to recognize this, it risks oversteering and pushing the economy into unnecessary pain.
The Myth of a Fixed Neutral Rate
At the center of Miran’s argument lies the neutral real interest rate (r*)—the level at which monetary policy is neither expansionary nor contractionary. Too often, this figure is treated as static. But Miran emphasizes that r* is shaped by external forces such as immigration flows, fiscal policy, tariffs, and regulation.
- Immigration has slowed, reducing labor force growth and lowering demand.
- Fiscal policy is shifting toward consolidation, raising national savings.
- Tariffs and trade frictions have altered investment and consumption patterns.
Taken together, these forces push r* downward, meaning today’s federal funds rate—above 5%—is not just restrictive, but deeply restrictive.
Conceptual Frameworks: Linking Non-Monetary Forces to Monetary Policy
To understand Miran’s perspective, it helps to place it in the broader conceptual frameworks economists use to assess monetary stance:
- Neutral Real Rate (r*)
The r* concept, formalized by Laubach & Williams (2003), is the real policy rate consistent with output at potential and inflation at target. Demographic shifts, fiscal balances, and global capital flows can move r* significantly over time. - Potential Output and the Output Gap
Non-monetary forces—like productivity shocks, immigration flows, or regulation—shift the economy’s potential output. Misjudging this can lead central banks to overestimate slack or overheating. - Phillips Curve Dynamics
Inflation is not solely driven by demand pressure. Globalization, energy shocks, and market structure can flatten or steepen the Phillips curve (Borio & Filardo, 2007). This affects how aggressively monetary policy must respond. - Fiscal-Monetary Mix
Sargent & Wallace (1981) and Leeper (1991) show how fiscal dominance can undermine monetary efforts. If fiscal policy tightens, the Fed may not need to lean as heavily on high interest rates.
Miran’s speech can be read as a reminder that these frameworks are not theoretical curiosities—they matter for policy calibration in real time.
Inflation Already on the Way Down
Miran pointed to housing as a key source of measurement distortion. Shelter accounts for nearly one-third of the consumer price index (CPI), and because of lags in how rent is recorded, official inflation still looks elevated even though private data show rents flattening.
He projects that shelter inflation will fall from 3.5% in 2024 to below 1.5% by 2027, mechanically lowering headline CPI by 0.3–0.4 percentage points. If the Fed waits until official data catch up, it risks keeping policy too tight for too long.
A Stark Policy Gap
Miran used Taylor-type rules to illustrate the divergence between current policy and what would be appropriate. Standard calculations suggest an interest rate of 3.6–3.9%, but after accounting for non-monetary forces and falling shelter inflation, the “right” rate looks closer to 2.0–2.5%.
The gap is not trivial. Each extra percentage point of policy tightness translates into weaker business investment, higher borrowing costs for households, and potential labor market damage.
The Bigger Picture: Non-Monetary Forces
Miran’s speech echoes a broader academic consensus that non-monetary forces shape the monetary policy environment (see Rachel & Summers, 2019). These forces shift r*, alter the output gap, and change inflation dynamics. A central bank that treats them as residual risks misjudging stance and tightening unnecessarily.
Table 1. Impact of Non-Monetary Shocks on Monetary Policy
| Non-Monetary Factor | Channel Affected | Impact on r* | Impact on Potential Output / Output Gap | Policy Implications |
| Fiscal Policy (tax, debt) | Public saving, investment | ↑ with deficits, ↓ with consolidation | Investment & productivity shape potential | Tight fiscal may justify easier monetary stance |
| Energy / Commodity Shocks | Input costs, relative prices | Neutral (temporary) | Lower incomes, possible shrinkage of potential | Balance inflation control vs. growth risks |
| Demographics & Immigration | Labor supply, saving | ↓ with aging; ↑ with immigration | Potential falls with aging, rises with immigration | Same nominal rate more restrictive in aging economies |
| Trade & Globalization | Import prices, supply chains | ↑ if re-shoring raises investment; ↓ if uncertainty curtails it | Higher costs reduce effective potential | Inflation more sensitive; rules need adjustment |
| Regulation & Deregulation | Barriers to entry | ↓ if regulation hinders investment; ↑ if deregulation spurs | Pro-competition raises potential GDP | Deregulation allows easier stance |
| Technology & Innovation | Productivity, capital demand | ↑ if capital-intensive; ↓ if capital-light | Raises potential output, temp lowers inflation | Transition may justify looser stance |
| Housing (shelter inflation lag) | CPI/PCE shelter weights | Neutral for r* | Drives measured inflation with lag | Risk of over-tightening if relying on lagging CPI |
The Counterpoint
Not everyone agrees with Miran. Some economists argue that the neutral rate may be rising, not falling. Structural forces such as re-shoring of supply chains, defense spending, and the green energy transition all require capital and push r* upward. If so, current policy may be less restrictive than Miran claims.
Others warn that declaring victory on inflation too early is a recipe for repeating the 1970s mistake—loosening prematurely and letting inflation expectations slip their anchor. The Fed’s credibility, they argue, rests on erring on the side of tightness until disinflation is firmly entrenched.
Why It Matters
The stakes are high. If Miran is right, the Fed risks engineering an unnecessary slowdown that costs jobs and weakens investment. If his critics are right, easing too soon could reignite inflation and undo years of painful credibility rebuilding.
What is clear is that Miran has forced the Fed into a conversation it cannot avoid: how much of today’s economic pain is necessary, and how much is self-inflicted by clinging to outdated assumptions about the neutral rate?
References
- Miran, Stephen. “Nonmonetary Forces and Appropriate Monetary Policy.” Speech, Board of Governors of the Federal Reserve System, September 22, 2025. Link
- Laubach, Thomas, and John C. Williams. Measuring the Natural Rate of Interest. Review of Economics and Statistics, 85(4), 1063–1070 (2003). JSTOR
- Rachel, Łukasz, and Lawrence H. Summers. On Secular Stagnation in the Industrialized World. Brookings Papers on Economic Activity, Spring 2019. Brookings
- Borio, Claudio, and Andrew Filardo. Globalisation and Inflation: New Cross-Country Evidence. BIS Working Paper No. 227 (2007). BIS
- Blanchard, Olivier, and Jordi Galí. The Macroeconomic Effects of Oil Price Shocks. NBER Working Paper 13368 (2007). NBER
- Sargent, Thomas, and Neil Wallace. Some Unpleasant Monetarist Arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review 5(3): 1–17 (1981). Minneapolis Fed
- Leeper, Eric M. Equilibria under “Active” and “Passive” Monetary and Fiscal Policies. Journal of Monetary Economics 27(1): 129–147 (1991). ScienceDirect
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