JPMorgan says Fed's monetary policy committee 'will remain unmoved' by Governor Miran

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Newly appointed Federal Reserve Governor Stephen Miran in a speech this week called for a federal funds rate almost 2 percentage points lower than current policy. After taking a look at his arguments, JPMorgan found some of them "questionable, others incomplete, and almost none persuasive."

"Barring a radical change in the composition of the FOMC, we don’t see his case winning the day," JPMorgan's Michael Feroli said on Thursday, referring to the Federal Open Market Committee.

"We investigate Miran’s arguments, and find that they are indeed incredible. However, we do not find them persuasive. We also strongly doubt they will convince others on the FOMC. As such, we are leaving intact our call for rates to be lowered in measured 25bp increments until reaching 3.25-3.5% early next year," Feroli added.

The Fed last week cut its key policy rate by 25 basis points, easing monetary policy for the first time in nearly nine years. Governor Miran voted against the action, instead preferring an even larger 50 basis point cut.

Miran, President Donald Trump's top economic adviser, was confirmed to the Fed's Board of Governors last week. He is filling in the seat vacated by Adriana Kugler in August.

Miran on Monday, speaking [https://seekingalpha.com/news/4497231-feds-very-restrictive-policy-poses-risks-for-employment-mandate-feds-miran-says] at the Economic Club of New York, said he believed the "appropriate fed funds rate" was "in the mid-2 percent area." The current rate is 4.00%-4.25%. One of the chief arguments in his speech was that the neutral rate of interest, also known as the r*, is 1 to 1.2 percentage points lower than where the markets and his colleagues on the FOMC think it is, due to policy changes made this year.

"Miran’s speech presented the dovish side of a number of issues regarding the monetary policy debate. A central part of his case was the importance of a lower estimate for the real neutral interest rate, or r*," JPMorgan's Feroli said.

Calling Miran's reasoning "selective and motivated," Feroli believes that it is "unlikely to persuade a committee that dissects every argument."

Miran in his speech also offered an optimistic view on rental inflation, contending that declining inflation in rents takes time to show up in the official inflation numbers.

"Almost all of Miran’s inflation discussion was occupied by a discussion of rental inflation. As for the other components, he assumes they will 'continue at their current run rates.' As Milton Friedman warned many years ago, looking at inflation exclusive of certain prices risks conflating relative price changes with inflation, a phenomenon of the overall price level," Feroli said.

"This only scratches the surface of the critique of Miran’s arguments. Picking apart everything he 'threw at the wall' would take time. But the relevant point here is that the Fed governors, presidents, and their staffs have the time and expertise to pick apart these arguments," he said.

"While Miran will have more opportunities to try to convince the Committee of the merits of his arguments, we are skeptical that the members will find them convincing, particularly when those arguments elide upside inflation risks," Feroli added.

The Fed has remained firmly in Wall Street's spotlight since its interest rate decision last week. Aside from Miran, traders have heard about the Fed's decision from several other policymakers over the past few days. Stocks were lower on Thursday. Here are some exchange-traded funds that track the benchmark S&P 500 index (SP500 [https://seekingalpha.com/symbol/SP500]): (NYSEARCA:SPY [https://seekingalpha.com/symbol/SPY]), (NYSEARCA:VOO [https://seekingalpha.com/symbol/VOO]), (NYSEARCA:IVV [https://seekingalpha.com/symbol/IVV]), (NYSEARCA:RSP [https://seekingalpha.com/symbol/RSP]), (NYSEARCA:SSO [https://seekingalpha.com/symbol/SSO]), (NYSEARCA:UPRO [https://seekingalpha.com/symbol/UPRO]), (NYSEARCA:SH [https://seekingalpha.com/symbol/SH]), (NYSEARCA:SDS [https://seekingalpha.com/symbol/SDS]), and (NYSEARCA:SPXU [https://seekingalpha.com/symbol/SPXU]).

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