Federal Reserve Board member Stephan Miran said monetary policy has passively tightened. He said the central bank can have lower interest rates and still support growth.
He said the Federal Reserve is one of the biggest risks to growth, and that policy may be tighter than understood. He said inflation, when adjusted for biases, is very close to target and that prices are roughly stable.
Implications For Policy And The Labor Market
Miran said there is some slack in the labour market and that monetary policy has room to help. He said it makes sense to support the labour market with looser policy, and he put the natural rate of unemployment at 4%.
He said he is not worried about inflation unless there is a strong uptick in the rental market. He also said tariff effects have not been seen in inflation.
He said the US fiscal outlook is improving and US growth is outperforming, supporting the US dollar’s reserve status. At the time of writing, the US Dollar Index (DXY) was around 97.00, up 0.10% on the day.
With monetary policy seen as having passively tightened, we believe the Federal Reserve has room to lower interest rates. The latest core Consumer Price Index (CPI) reading for January 2026 came in at just 2.1% year-over-year, reinforcing the view that inflation is very close to the central bank’s target. This suggests the risk of an inflationary spiral is low, giving policymakers more flexibility.
Trade Positioning And Market Impact
These comments should shift expectations for the Fed’s next move, making rate cuts in the second quarter more probable. Derivative traders should consider positioning for a more dovish path using Secured Overnight Financing Rate (SOFR) futures, pricing in at least one or two cuts before the end of the summer. Buying call options on Treasury note futures (ZN) could also be an effective way to gain upside exposure to falling yields.
For equity markets, this outlook is supportive, as lower rates increase the valuation of future earnings. We should consider buying call spreads on the S&P 500 (SPX) or Nasdaq 100 (NDX) to capitalize on a potential rally in growth-oriented sectors. This environment lessens the fears of a Fed-induced slowdown that have been weighing on stocks.
Despite the recent strength of the U.S. Dollar Index, a clear pivot toward looser policy would likely weaken the currency. The recent Q4 2025 GDP growth of 2.5% shows U.S. outperformance, but rate differentials are key for currency traders. We could look at purchasing puts on U.S. Dollar Index futures or calls on the EUR/USD pair in anticipation of this shift.
The labor market data also supports this view, with the January unemployment rate ticking up slightly to 4.2% and annual wage growth slowing to 3.5%. This indicates there is some slack in the market, allowing the Fed to focus on its employment mandate without stoking inflation. This is a significant change from the tighter labor market conditions we saw throughout much of 2024.
Looking back from 2025, we saw a similar situation unfold in early 2019 when the Fed pivoted from a tightening bias to an easing one. That shift preceded a significant rally in risk assets as the market priced out rate hikes and began anticipating cuts. The current commentary suggests a similar playbook could be unfolding now.
