Federal Reserve President Advocates for Interest Rate Cuts
On Monday, Federal Reserve President Stephen Milan expressed his belief that inflation is closer to the central bank’s 2% target than current data suggests. He emphasized the need for quicker interest rate cuts while stepping back from previous assertions that tariffs are the main factor behind rising prices.
During a lecture at Columbia University, Milan pointed out that issues in the Fed’s inflation measurement—like delayed shelter costs and anomalies in service pricing—give a misleading impression that price pressures are still high. In reality, he thinks underlying inflation is trending closer to the target.
“Keeping policies overly strict, stemming from past imbalances and measurement quirks, will lead to job losses,” he warned, mentioning that any damage to the job market could happen quickly and would be hard to reverse.
Milan has introduced a measure he calls “market-based core ex-shelter” inflation, which excludes both home prices and estimated costs that don’t reflect actual consumer spending. His calculations show that this underlying inflation is below 2.3%, comfortably within the Fed’s target.
He argued that the Fed’s preferred price index trails behind real market rents. The increase in shelter inflation is more of a reflection of past supply-demand imbalances than current economic realities. Recent rent data indicates low increases for new tenants, suggesting a notable decline in future shelter inflation rates.
“We need to be careful when assessing the real underlying inflation pressures,” he noted. “The observed excess inflation doesn’t accurately represent current supply and demand dynamics.”
Milan also strongly refuted the idea that tariffs are driving inflation. He argued that economic theory and evidence suggest this isn’t the case.
He presented an analysis indicating that tariffs would only increase consumer prices by about 0.2%, which he characterized as “noise.” He challenged studies that forecast larger inflationary impacts, arguing that if tariffs were the main inflation factor, core goods that rely heavily on imports would show significantly higher inflation.
“Since last year, prices for core goods have increased similarly to import-heavy items,” he observed. He compared inflation rates in the U.S. to those in other developed nations, noting that U.S. inflation is on par with Canada and the UK, slightly above the European Union, and lower than Mexico. “The U.S. isn’t a significant outlier in any respect,” he stated.
This perspective contradicts common predictions that the Trump administration’s tariff expansions would severely inflate prices. Milan, appointed to the Fed’s board by Trump, believes that standard estimates of how tariffs affect consumer prices are flawed.
He argued, based largely on academic work on trade elasticity, that the burden of tariffs primarily falls on exporters rather than U.S. consumers. By analyzing demand and supply elasticity at the product level, he found that exporters bear at least 70% of the tariff cost for approximately 70% of imported goods by value.
Milan explained that, as a country with a significant trade deficit, the U.S. has few substitutes for its demand, but many for supply. Therefore, foreign producers tend to absorb most tariff costs rather than pass them to American buyers.
He referenced research by Jackson Mejia, which indicates that earlier studies on tariff-transference during the U.S.-China trade conflict showed selection bias. Those studies overlooked how Chinese exporters sidestep tariffs via transshipment—sending goods through third countries—or by using duty-free rules for low-value shipments.
“Such studies are biased due to changes in trade routes and limited exemptions,” he noted, adding that about 40% of products subject to tariffs experience transshipment, with substantial trade in intermediate and capital goods.
Aside from questioning the inflationary impact of tariffs, Milan suggested that the Fed should disregard any such effects even if they emerge. He likens tariffs to value-added taxes, which central banks traditionally “consider” but do not react to with monetary changes.
“Central bankers typically ‘look through’ temporary shocks, as a brief price increase differs from sustained inflation,” he pointed out. He stated that monetary policy maintains price stability by balancing demand and supply, and fluctuations caused by tax changes do not indicate imbalances between the two.
Milan acknowledged some possible short-term pass-through effects but argued these would be temporary. He predicted that any inflation uptick would likely be followed by a deflationary trend as long-term economic strength asserted itself. “The rise in inflation will probably be short-lived, and the subsequent price level increase will likely be temporary,” he said.
He also mentioned that the timing of recent commodity inflation contradicts the tariff argument. While core goods inflation in the Fed’s index seemed linked to tariffs expected to take effect in 2025, consumer price increases began in mid-2024, prior to any new trade policies.
Milan conceded there’s still some uncertainty around the factors driving rising prices, proposing three possible explanations: noise in the statistics, ongoing fluctuations following a post-pandemic decline, or a long-term shift in prices due to supply chain adjustments for national security—all occurring before recent tariffs.
“I accept we don’t completely understand what’s behind the price increases,” Milan acknowledged. “Pretending to have all the answers obstructs our grasp of the reality.” He also criticized the Fed’s approach to measuring certain service prices, particularly in portfolio management fees, which he claimed significantly inflate reported inflation figures without reflecting real supply and demand conditions. According to industry data, asset management fees dropped 6% in 2024, while the Fed’s price index rose about 20% based on asset management growth.
“If the PCE had aligned with industry data indicating a 6% decline, core PCE would have been about 40 basis points lower than what’s reported,” Milan noted. “We’re at a point where high interest rates are a result of this misleading inflation linked to portfolio fees.”
The Fed recently cut interest rates for the third consecutive time, but further cuts aren’t guaranteed, and several officials have voiced concerns about inflation exceeding targets. Milan has become one of the more dovish voices in the Federal Open Market Committee, advocating for a quickened pace of rate cuts to achieve a neutral policy stance that does not either encourage or hinder economic growth.
