On Monday, Stephen Milan, a new member of the Federal Reserve, expressed concerns that the central bank’s current policy is too tight, urging colleagues to consider the risks of slowing the economy further, especially with inflation on the decline.
During his speech at the New York Economic Club, Milan suggested that the Fed’s benchmark interest rate should be around 2 to 2.5 percent, which is about two points lower than it is now. He argued that recent shifts in immigration, fiscal policies, and trade dynamics have altered the fundamental balance between savings and investment, changes that many economic models seem to overlook. Consequently, he cautioned that officials might be underestimating the restrictiveness of the current policy.
“I view the policy as extremely restrictive, and I think it’s posing a substantial risk to the Fed’s mandate on employment,” he said, adding that keeping borrowing costs high winds up causing unnecessary layoffs and elevating the risk of unemployment.
A primary focus of Milan’s argument revolves around demographics. He noted that for most of the last decade, the US population grew at about 1% annually, in part due to immigration. However, this year, that trend appears to be shifting abruptly. With stricter border regulations and a slowing influx of immigrants, population growth might dip to less than half its previous rate.
With fewer workers joining the labor force, Milan contended that the economy’s potential growth rate could be lower than if the Biden administration had maintained more open border policies. This alteration alters the savings-investment dynamic, leading to lower “neutral” interest rates—which are the levels that neither accelerate nor decelerate growth. He cautioned that if the Fed is calibrated according to old growth trajectories, it risks applying excessive brakes to the economy.
At the same time, Milan noted that certain policies might push in the opposite direction. For example, he pointed out that tax reforms could enhance national savings, stimulate business investments, and potentially raise those neutral rates. Furthermore, by temporarily boosting demand and aligning the economy more closely with its potential output, appropriate policy rates could be adjusted upward. While deregulation and energy policy changes may only have a modest impact, they could still bolster economic growth and optimize the neutral rate by lowering barriers and increasing productivity. He viewed these factors as significant but insufficient to counterbalance the demographic, trade, and deficit-related shifts affecting neutral rates.
His analysis suggests the neutrality rate could be approaching zero, meaning that current federal funding rates may exert far more restriction than intended. “Considering this analysis, I think the appropriate Fed funding rate is in the 2% range for the medium term,” he stated.
This discussion underscores the growing tension within the central bank over whether to prioritize persistent inflation or focus on signs of weakening in the labor market. In last week’s meeting, policymakers opted to leave rates unchanged but revealed significant divisions regarding future directions.
Milan, a Trump appointee who was confirmed as a governor last week and is currently on leave from directing the White House Economic Advisory Board, seems to occupy a rather extreme position. Besides demographic changes, he mentioned a decrease in rental inflation—not yet reflected in official data—and increased national savings from tariffs and tax changes as additional forces contributing to lower neutral rates.
His analysis reflects a wide array of questions regarding the Fed’s current trajectory. There’s an ongoing debate about whether recent policy shifts are fundamentally reshaping the US economy, necessitating a new financial framework—from trade renegotiations to financial adjustments.
Not every Fed official shares his sense of urgency, though. Federal Reserve Bank of St. Louis President Alberto Musalem indicated in another appearance on Monday that, while he supports recent rate cuts as preemptive action, he believes monetary policy is currently “conservatively restrictive” rather than neutral. He suggested that further cuts should only come into play if the labor market worsens.
Rafael Bostic, president of the Federal Reserve Bank of Atlanta, echoed similar sentiments in an interview with a financial publication. He expressed concern about persistent inflation and suggested there’s little reason for additional cuts for the time being, predicting that core inflation would end the year around 3.1%, with unemployment rates slowly increasing.
All these comments collectively highlight the conflicting pressures facing central banks. Milan is advocating for quicker action to stave off rising unemployment, while regional presidents like Musalem and Bostic stress the risks of inflation running too high. This divergence not only mirrors differences in economic models but also reveals deeper discussions about how the Trump administration’s policies on immigration, trade, taxation, and regulation are reshaping the fabric of the US economy.
