Why Reducing Immigration Leads to Lower Interest Rates

When economists discuss immigration, the focus usually leans heavily on job markets, wages, or financial implications. But Federal Reserve Governor Stephen Milan wants to shine a light on another factor: interest rates.

In Milan’s initial address since joining the Federal Reserve, he underscored that changes in immigration rates could significantly drive down inflation. He referred to what’s known as the “neutral” interest rate—essentially, the rate that allows economic growth to stabilize without contributing to inflation. If net immigration drops suddenly from the pre-pandemic average of about 1 million annually to nearly zero, he projects that rental inflation could decelerate by several percentage points each year. This reduction would ease overall inflation, implying that the current policy might be more restrictive than it seems.

The extent of this shift is already evident in the data. Milan noted that around 1.5 million immigrants departed the U.S. in the first half of 2025, suggesting a potential trend of sustained net migration loss unseen in a generation.

How Immigrants Influence Housing Costs

Milan’s perspective draws from the research of Albert Saiz, an MIT economist. In the 2000s, Saiz documented the impact of immigration on local housing markets. By comparing various U.S. metropolitan areas with differing levels of immigration, Saiz concluded that rents typically increase in line with the number of immigrants. This phenomenon is often termed “unit resilience.” In straightforward terms, a 1% rise in a city’s population due to immigration correlates with about a 1% increase in rents.

The process is quite clear. Immigrants often settle in clusters, driving up housing demand in specific cities. Since the housing supply doesn’t always keep pace, this influx quickly translates into higher rent prices. Further studies have shown similar trends in other countries, where immigrant-headed households are generally more likely to rent compared to native-born families.

By referencing Saiz’s work, Milan argues that immigration levels are not just long-term demographic concerns. They have immediate implications for rental inflation and significantly influence the consumer price index. A decline in immigrant numbers translates to reduced upward pressure on the rental market.

Our Future and its Economic Implications

However, rent is just one aspect of the bigger picture. It seems logical that slower immigration leads to reduced population growth. In the short term, this slowdown lowers the demand for economic capital and, consequently, the neutral rate. Compounded by tax policies that cut tariff revenues and increase deficits, national savings also decrease. An excess of savings over investments tends to push the neutral rate down. While deregulation and energy policies could somewhat counteract this by boosting productivity, Milan perceives the overall effect as a limitation on economic speed.

This “speed limit” refers to what economists call R*. Think of it as the natural pace at which the economy operates. If the Fed sets interest rates too high, it’s like hitting the brakes; growth slows down, and unemployment climbs. Setting rates too low can heat up the economy and lead to inflation. Milan’s calculations suggest the Fed’s benchmark rate should ideally fall within the double range, as he warns of the risks of “unnecessary layoffs and higher unemployment.”

This argument positions Milan at odds with some of his Fed colleagues, who appear more cautious about reducing rates. He openly recognized that his views differ from those of other members of the Federal Open Market Committee, particularly central bankers.

Milan’s reasoning holds up in the short run, but may not be sustainable long-term. A flourishing economy—especially one offering myriad opportunities for younger individuals—tends to drive population growth. If immigration policies are liberal, much of that growth will stem from immigrants. If immigration becomes restrictive, it may spur an increase in the birth rate among the native population, as previous research by Richard Easterlin indicated that younger individuals tend to marry and have children earlier when their prospects improve. Thus, limits on immigration could hinder population growth and lower the neutral rate, while in the long run, economic growth would settle into equilibrium. Of course, this is a lengthy process, as there’s typically a delay between the initial formation of homes and the arrival of new workers.

The notion that demographics influence interest rates isn’t new. Prior to the pandemic, many analysts cautioned that nations with declining fertility rates could be at risk of drifting toward low equilibrium, similar to Japan. Milan’s insights highlight that a slowdown in immigration accelerates this trend in the U.S. Lower population growth results in reduced demand for housing and capital, subsequently lowering rents and the neutral rate.

The implications are significant. For years, debates about monetary policy have revolved around inflation expectations, wage growth, or fiscal initiatives. Milan posits that immigration levels and fiscal decisions are already impacting the economy’s neutral rate, and monetary policy must adapt to this shift. If he’s correct, the Fed’s constraints are not as light as they might believe.