Stephen Miran said the Federal Reserve should remain cautious, with policy decisions guided by incoming data and inflation risks not yet fully resolved. He said he favours three, maybe four, interest rate cuts this year, though he also said it might only be three cuts for the rest of the year.
He said that a year from now 12-month PCE inflation could be around the 2% target. He also said there is no evidence of a wage-price spiral and that long-term inflation expectations are anchored.
Miran said it remains reasonable to expect core goods prices and housing inflation to keep easing. He said the recent energy shock has not changed his inflation outlook for 12 to 18 months ahead compared with before the war.
He said the war has widened the distribution of risks around the modal outlook, and that inflation was becoming more problematic even before the war. He rejected linking goods inflation to tariffs, and said it is irresponsible to blame tariffs for multiple forces pushing prices higher.
He said the labour market cooling trend appears to be continuing. He also said the Fed should move towards a neutral rate as low as 2.5%, with a neutral real rate of about 0.5%.
He said growth and unemployment have been less closely correlated than in the past, with causes uncertain and possibly related to AI. He said energy-price-driven shifts in consumer spending are a drag on growth, even though the US is an energy exporter.
Looking back at commentary from 2025, we were hearing a strong case for three, maybe even four, rate cuts. The view was that inflation was on a clear path back to the 2% target within a year. This was based on the expectation that goods prices and housing inflation would continue their decline.
However, the data through the first quarter of 2026 has challenged this outlook significantly. The latest Core PCE reading for March came in hotter than anticipated at a 3.1% annualized rate, showing inflation remains stubborn. This is a far cry from the 2% target we thought was within reach by now.
The labor market also failed to cool as expected, which we now see was a key misjudgment from last year’s analysis. The March 2026 jobs report showed another strong gain of over 240,000 jobs, with wage growth still hovering near 4.0%. This persistent strength provides the Federal Reserve with little reason to rush into cutting rates.
For derivative traders, this means the “higher for longer” theme is firmly back in play. The SOFR futures curve has aggressively repriced, with markets now only factoring in one potential cut by year-end, a dramatic shift from the multiple cuts expected in 2025. This suggests positioning for sustained high short-term rates remains the dominant strategy.
Options on Treasury futures are indicating heightened uncertainty, with implied volatility ticking up. Traders should consider strategies that benefit from either a prolonged period of stable but high rates or a sharp move if upcoming data forces the Fed’s hand. Selling out-of-the-money calls on Eurodollar or SOFR futures could be a way to capitalize on the market’s reduced expectations for rate cuts.
The idea that the neutral rate could be as low as 2.5%, or 0.5% in real terms, now seems highly unlikely. The resilience of the economy in the face of current rates suggests the true neutral rate is substantially higher. This structural shift supports the view that we will not be returning to the low-rate environment of the previous decade anytime soon.
While the primary trend points to sustained high rates, we must watch for any cracks in the economic foundation. Initial jobless claims have remained low, but any sustained move above the 230,000 mark could be an early signal of the labor market finally weakening. Such a development would quickly alter the current market dynamics and expectations for monetary policy.
