Episode summary
Former Fed Governor Stephen Miran: The Fed risks overreacting to transitory inflation
Summary
Stephen Miran argues the Fed is in danger of tightening too much because it is reacting to inflation that may be largely temporary. He says monetary policy works with long and variable lags, so rate changes today can take 1 to 2 years to hit the economy, which raises the risk of overshooting if the Fed leans on stale models and incomplete data. He also says new technology, including AI, could help generate faster, better real-time economic readings.
Miran points to a Goldman Sachs report suggesting more than 1% of core PCE is being driven by temporary factors, including energy tied to Iran and mismeasurement connected to the tech buildout. In his view, those effects should fade over the next year, pulling inflation lower even without more tightening. He says he would not have supported hikes in September or December, though he thinks the Fed is likely to keep raising rates because its reaction function has changed.
He also argues the supply side of the economy may be expanding thanks to new technologies, regulatory changes, and tax changes from last year. That, he says, could allow stronger growth without inflation, similar to the pre-pandemic period when unemployment was 3.5% without major inflation pressure.
Key takeaways
- Miran says the Fed risks overreacting because rate changes hit the economy with a 1 to 2 year lag.
- He says more than 1% of core PCE may reflect temporary energy and measurement distortions, not persistent inflation.
- Miran would not have supported rate hikes in September or December, though he thinks the Fed will likely keep hiking.
- He argues AI and other new tools could improve real-time economic data and reduce reliance on stale models.
- Miran says supply-side gains from technology, deregulation, and tax changes could let the economy grow faster without inflation.
Notable quotes
“MONETARY POLICY WORKS IN THE ECONOMY WITH LONG AND VARIABLE LAGS. IF YOU CHANGE INTEREST RATES TODAY, IT DOESN'T HIT THE ECONOMY FOR 1 TO 2 YEARS, RIGHT”
“A NICE REPORT FROM GOLDMAN SACHS A COUPLE DAYS AGO, WHICH ARGUED THAT OVER 1% OF THE CORE PCE DATA IS DUE TO TEMPORARY FACTORS LIKE ENERGY IN IRAN”
“THERE'S A COMPLETELY NEW REACTION FUNCTION IN TOWN. IT SEEMS THAT THIS NEW REACTION FUNCTION IS LEADING THEM TO LEADING THEM TO FORECAST ADDITIONAL HIKES”
“THERE WASN'T REALLY A LOT OF QUESTIONING OF INFLATION IN THE FINANCIAL MARKETS, RIGHT? THE QUESTIONING OF INFLATION HAS BEEN, I THINK, A CONVERSATION PEOPLE HAVE BEEN ASKING”
“IF ALL THOSE THINGS PUSH OUT THE SUPPLY SIDE OF THE ECONOMY, THEN YOU CAN GROW WITHOUT INFLATION”
How the episode opens
27. But those are good numbers considering we're going through an energy shock right now, as well as a bunch of other unexpected things in the economy. — All right. — Steve, the fed is hiking. — Thank you. — My pleasure.
All right. Join us now on the state of the economy and implications for the fed. Hudson Bay Capital a senior strategist, stephen myron, who has served as fed governor and cea chair in the second trump administration.
Stephen, I was reading this this malpass op ed today. And I got to say, I had I thought about you and I was happy that you were coming on because there's been a lot of things about what the fed uses to make decisions that you've talked about in the past that are that are flawed. And this is the you had some very specific things about pce and that you think should be changed.
But overall, maybe ai helps us be better at figuring out current economic data instead of always using things in the past.
Good morning. Thanks for having me. I mean, yeah, I agree with that.
I think we're going to end up getting more and better data faster because the new technology, new technological tools that are starting to implement. But look, you know, it's important to understand that the federal reserve, you know, because of its mandates from congress, it targets stable prices and maximum employment. And so the targets themselves are kind of given by given by congress.
But I do think that it's it's likely the new technology is help them get a better real time sense of where the economy is.
Well, I thought of you just in the first I read this earlier in the show, the first sentence that the outdated economic models that the fed uses are pushing it towards an interest rate increase that would hurt affordability, cause some inflation with mortgage rates and loans and everything else, and do very little for what's causing it.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fed inflation fight
- rate path outlook
- transitory inflation
- economic outlook
- ai impact
Companies and tickers mentioned
- Hudson Bay Capital
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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