Milan believes that 'illusory inflation' distorts the Fed's decision-making, stating that the current above-target inflation does not reflect the economy's underlying supply and demand dynamics, and housing inflation is a lagging indicator. He warns that maintaining unnecessary tightening will lead to unemployment; he may remain on the board until a new governor is appointed after his term ends at the end of January. Meanwhile, Williams, the 'third-in-command' of the Federal Reserve, stated that monetary policy is now 'well-positioned' for next year following last week's rate cut. Collins, a voting member this year, said that supporting the rate cut last week was a difficult decision as she remains concerned about inflation.
Stephen Miran, a Federal Reserve governor handpicked by U.S. President Trump this year, reiterated that the Fed's policy stance imposes unnecessary constraints on the economy. He argued that after excluding "phantom inflation," the "underlying" inflation level is already close to the Fed's target. Amid deep divisions within the Fed over interest rate policy, Miran's staunch support for Trump's calls for rate cuts stands in stark contrast to the positions of several other Fed officials.
On Monday, October 15, Eastern Time, Miran, speaking at an event at Columbia University, stated that it is reasonable for American households to feel pain from recent inflation experiences. While prices are higher, they have now stabilized again, and monetary policy should reflect this reality. He reiterated that the Fed should cut rates more quickly, warning that maintaining unnecessarily tight policies could lead to unemployment.
Miran noted that after excluding housing services and statistical distortions, underlying inflation is running at a pace below 2.3%, within the noise range of the 2% target. He pointed out that housing inflation reflects supply and demand imbalances from two to four years ago rather than current conditions. Some inflation drivers, such as portfolio management fees based on current high asset prices, reflect statistical anomalies rather than actual consumer price experiences.
On the same day, John Williams, the “third-in-command” of the Federal Reserve and president of the New York Fed, expressed a markedly different stance. He stated that the Fed’s monetary policy is already “prepared” for 2026, implying a high threshold for further rate cuts. Susan Collins, president of the Boston Fed, who has voting rights at the Federal Open Market Committee (FOMC) meetings this year, said her decision last week to support a rate cut was a “difficult one,” as she remains concerned that high inflation may persist.
"Phantom Inflation" Theory Draws Attention
In his speech at Columbia University, Miran elaborated on his views on inflation, arguing that "phantom inflation" distorts the Fed’s monetary policy decisions, keeping policy rates unnecessarily high. He suggested that the current above-target inflation does not reflect the economy’s underlying supply and demand dynamics, and that the price increases generated by the current economic situation are closer to the Fed’s 2% target.
The Fed’s preferred inflation gauge, the PCE price index, rose 2.8% year-over-year in September, surpassing the 2% target. However, Miran argued that housing inflation is partly a lagging indicator and does not reflect the reality that rent growth is slowing. “Housing inflation reflects supply and demand imbalances from two to four years ago, not current ones,” he said, predicting that housing inflation will ease as the surge in rents during the pandemic normalizes.
Miran also noted that core service inflation, excluding housing, food, and energy, is unlikely to face upward pressure as the labor market cools. He specifically mentioned that some drivers of service inflation, such as portfolio management fees, reflect statistical anomalies rather than actual consumer price experiences.
Miran stated that if housing is further excluded and only market-based core inflation is considered, underlying inflation is running at a pace below 2.6%. “A better measure of underlying inflation should account for distortions in housing and imputed prices,” he said.
Warning from the Labor Market
Milan stated, while discussing the labor market, that maintaining the Federal Reserve's policy rate at an unnecessarily high level would lead to unemployment. He said:
"Experience shows that deterioration in the labor market can happen quickly and in a non-linear fashion, and is difficult to reverse. Partly due to the lag of several quarters in monetary policy, a faster pace of easing — as I have advocated — would appropriately bring us closer to a neutral stance."
Milan added that, given the lag effects of monetary policy, the Federal Reserve needs to set policies for 2027 rather than 2022. He warned that maintaining unnecessarily tight policies due to imbalances in 2022 or artificial factors in statistical measurements would result in unemployment.
At last week's Federal Reserve FOMC meeting, it was decided for the third consecutive session to cut interest rates by 25 basis points. The resolution published after the meeting showed Milan cast a dissenting vote again because he continued to advocate for a larger 50-basis-point rate cut. This marks the third time Milan has dissented at an FOMC meeting since assuming his role as a governor in September this year.
The Puzzle of Goods Inflation
Milan admitted that he could not fully explain why current inflation is so high, particularly why goods prices are rising. However, he noted that his analysis of recent data suggests it is unrelated to tariffs imposed by the Trump administration.
"I admit I do not know what is driving the current higher goods inflation," Milan said, but allowed for an "unpleasant possibility" that goods inflation is "stabilizing" at levels higher than pre-pandemic.
At last week’s meeting, two of Milan’s colleagues dissented, favoring keeping rates unchanged as inflation had not made progress toward the Fed’s target recently. Many Fed officials attributed this to what they believe are price increases in goods related to import tariffs implemented by the Trump administration.
Milan’s Term Extended
Prior to serving as a Federal Reserve governor, Milan was appointed as an economic advisor to the White House and is currently on unpaid leave from that advisory role. Milan told the press on Monday that after his term as a governor ends in late January next year, he may continue to stay at the Federal Reserve until new appointments are confirmed and someone takes over his position.
Under the laws governing the Federal Reserve, the aforementioned approach is permitted. Given that Fed Chair Powell has not indicated whether he will step down from his position as a Fed governor when his term ends in May next year, Trump is expected to leverage Milan's seat to place his nominee for Fed chair onto the Board of Governors.
Trump has hinted that he may decide early next year on who will succeed Powell as Fed chair, and has made clear that he will only choose someone who supports his call for significant interest rate cuts. The extension of Milan's term means that Trump may not face time pressure to nominate or secure Senate confirmation for his choice for chair, as Milan’s interest rate policy stance generally aligns with Trump’s preferences.
However, Milan told the press on Monday that whether he continues to cast dissenting votes at future FOMC meetings will depend on how other Fed officials handle policy going forward. He stated that as the Fed lowers rates and reduces the restrictiveness of its policy on the economy, "the need to vote for additional substantial rate cuts will also diminish accordingly."
Different Stances of Williams and Collins
New York Fed President Williams said at an event in New Jersey on Monday that following last week’s rate cut, the Fed’s monetary policy is now well-positioned for the coming year. He noted that with rising employment risks and easing inflationary pressures, the Fed has shifted its policy stance from moderately restrictive toward neutral.
Williams projected that U.S. economic growth would accelerate to approximately 2.25% next year from an expected 1.5% in 2025, driven by fiscal policy support, "favorable financial conditions," and investments in artificial intelligence (AI). He also forecast that inflation would remain slightly below 2.5% next year and reach the target of 2% in 2027.
In response to questions after the event, Williams stated that monetary policy has now been adjusted to address either of the key risks central to the Fed’s primary objectives—excessive inflation or a labor market that is too weak. He remarked: "We have lowered rates this year based on data and outlook, and I believe this puts us in a good position to balance these two competing risks effectively."
Boston Fed President Collins posted on social media platform LinkedIn on Monday that she supported last week’s decision to cut rates by 25 basis points, but described it as a "difficult decision."
Collins wrote: "While my analysis in November leaned toward keeping policy unchanged, by the December meeting, available information suggested that the balance of risks had shifted slightly." She added: "With inflation having remained elevated for nearly five years, I still worry that it could persist."
Editor/Lambor