Fed’s Miran: Current fed policy is more restrictive than people think because the neutral rate has fallen

Key Comments

AI investment could lead to a higher neutral interest rate.

Recent policy changes, including immigration, have produced fast changes in the neutral rate.

Current fed policy is more restrictive than people think because the neutral rate has fallen.

Difference with policy views of colleagues is more based on speed of cuts than destination.

Have a more sanguine view of inflation, mostly due to expectations about housing costs.

In coming quarters there will be a material decline in services inflation driven by housing.

Put less weight on the value of changing policy gradually.

If data comes in hotter than expected would have to reevaluate.

If housing in particular does not show falling inflation would have to question outlook.

Feel confident that shocks like immigration are large enough to influence policy.

No evidence in the data that tariffs are raising inflation; arguments otherwise are based on prior trends.

Key categories of imported goods are not seeing price increases that different from other goods.

Goods inflation rates in the US are comparable to those in other countries."

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.