Stephen Miran from the Federal Reserve Board believes that inflation pressures in the US are linked to the effects of migration, and he thinks immigration controls could help. He estimates the neutral interest rate, known as r-star, at 0.5%. This is lower than the usual range seen in current models, which is between 0.8% and 1%. In the first half of the year, economic growth was slower than expected, but Miran is hopeful now that economic uncertainties are easing. He suggests that the Federal Reserve should adopt a forward-looking policy, warning that a restrictive monetary policy can be risky if not adjusted properly.

Inflation Outlook

Miran feels optimistic about inflation, expecting rent prices to stabilize, which could reduce overall price pressures. He points out that the current economic data needs careful interpretation and does not view tariffs as a significant factor affecting inflation at this time. He believes there is no need to change the Fed’s inflation targets and insists that private data cannot fully substitute for government data. Although bond market reactions are encouraging a rapid rate cut, he advises against intentionally targeting long-term rates under normal conditions. Miran’s comments today suggest that the Federal Reserve might cut rates sooner than the market anticipates. With his neutral rate estimate at 0.5%, it indicates that current policy is restrictive and needs to change soon to prevent harming the economy. This could lead to a more aggressive rate-cutting cycle starting before the year ends.

Market Expectations

This cautious outlook is supported by recent economic data. The September Consumer Price Index (CPI) report showed headline inflation falling to 2.8%, and last week’s jobs report indicated a weakening labor market, with the unemployment rate rising to 4.1%. These figures lend credibility to the notion that inflation is manageable, which paves the way for the Fed to adjust their stance. As a result, we should prepare for lower interest rates in the coming weeks. The chance of a rate cut at the November meeting has risen from 15% to over 40% in the fed funds futures market after these statements. We see potential in purchasing December 2025 and March 2026 SOFR futures to take advantage of this shift in expectations. A move toward rate cuts would also positively impact equities, especially in growth-focused sectors that are sensitive to interest rates. The prospect of lower borrowing costs could enhance valuations for technology and consumer discretionary stocks. We’re considering buying near-term call options on the Nasdaq 100 index in anticipation of a potential year-end rally. This outlook also greatly impacts the US Dollar, which has maintained strength due to high interest rates for over a year. A dovish Fed is likely to weaken the dollar, and we expect the DXY index to drop below the important 103.00 support level soon. This makes long positions in EUR/USD and GBP/USD attractive, possibly through options to minimize risk. In late 2023, the markets reacted strongly when the Fed first hinted at halting its rate hikes, leading to a significant rally in stocks and bonds. The current situation feels similar; a single comment from a Fed official can initiate a substantial policy shift. It’s crucial to position ourselves ahead of the crowd before this viewpoint becomes widely accepted. Create your live VT Markets account and start trading now.

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