Federal Reserve policymaker Stephen Miran stresses the importance of forward-looking analysis in shaping monetary policy. He sees housing costs as a key driver of inflation and believes shelter inflation is likely to decrease. Miran warns that relying on outdated data can lead to poor policy decisions.

Predicting Disinflation in Service Inflation

Miran highlights the potential for economic growth through deregulation and emphasizes the role of financial conditions in how monetary policy is applied. Current financial conditions are tight, as the neutral interest rate has fallen. Public inflation expectations remain stable, with many anticipating that the Fed will keep inflation low. He predicts a decrease in service inflation due to population changes and notes that small inflation shifts can be hard for households to notice. He also points out that demand elasticity helps Americans manage tariffs without causing widespread inflation, forecasting a drop in shelter inflation. If shelter inflation does not decrease as expected, Miran is open to adjusting policies. He also mentions that financial conditions might not accurately reflect Fed policies. He expects to have the needed data by the next Federal Open Market Committee meeting to guide decision-making. The Fed seems to be favoring a forward-looking strategy. Even with loose financial conditions, monetary policy is viewed as tight because the neutral interest rate has declined, making current rates more restrictive. Thus, the Fed will likely focus less on recent inflation numbers and more on future projections, particularly regarding housing. The emphasis on housing costs is crucial, as there are expectations for significant disinflation in the services sector connected to shelter costs. Recent data supports this claim, with the September 2025 Zillow Observed Rent Index showing annual rent growth at 2.8%, its lowest since early 2024. If this trend persists, it suggests that a major part of inflation is already easing, reducing the need for further tightening.

Inflation Expectations and Market Reactions

With inflation expectations viewed as “reasonably well anchored,” the Fed can afford to be patient. A recent survey from the University of Michigan confirms this, showing five-year inflation expectations at 2.7%. This confidence allows policymakers to overlook short-term inflation spikes, like last month’s CPI report, and concentrate on the broader disinflation trend. For derivative traders, this indicates a potential decline in long-term interest rates and lower market volatility. The CME FedWatch Tool data shows a 65% likelihood of a rate cut by March 2026. Strategies that take advantage of falling bond yields, such as buying long calls on Treasury bond ETFs or selling puts on interest rate futures, could be appealing. However, we should also consider the divisions within the Fed, as some members are still concerned about ongoing inflation pressures. This disagreement creates risks around upcoming FOMC meetings and crucial data releases like the next CPI report. Traders may want to utilize options to hedge against unexpected hawkish shifts or prepare for potential volatility spikes if the expected decrease in shelter costs does not happen. This dovish outlook is likely to pressure the US dollar while supporting risk assets like stocks. The ongoing rise in the Dow Jones Industrial Average reflects optimism for rate cuts, aligning with this forward-looking stance. We can expect currency pairs such as EUR/USD to stay stable near the 1.1750 level as long as this narrative continues. Create your live VT Markets account and start trading now.

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