Federal Reserve policymaker Stephen Miran emphasises the need for forward-looking analysis in shaping monetary policy. He considers housing costs central to inflation dynamics and expects shelter inflation to ease. He warns against using outdated data, indicating it may misguide policy decisions.
Predicting Disinflation in Service Inflation
Miran notes the potential economic expansion through deregulation and the importance of financial conditions in monetary policy transmission. Current financial conditions remain unloosely tight as the neutral rate has decreased. Public inflation expectations are steady, with the expectation that the Fed will maintain low inflation.
Miran predicts disinflation in service inflation linked to population shifts. He states small inflation changes are hard for households to detect. He also mentions that demand elasticity allows Americans to manage tariffs without a broad-based inflation increase, expecting shelter inflation to decrease.
If the easing of shelter inflation does not occur, Miran is open to revising policies. He also states that financial conditions may not provide an accurate gauge for Fed policies. He anticipates having necessary data by the next Federal Open Market Committee meeting to assist in policy-making.
The Fed appears to be signaling a forward-looking approach, suggesting that even with loose financial conditions, monetary policy is considered tight. This perspective is based on the idea that the neutral rate of interest has fallen, giving current rates more restrictive power. We should anticipate that the Federal Reserve will place less weight on recent inflation prints and more on future projections, especially concerning housing.
This focus on housing costs is critical, as there’s an expectation for significant disinflation in the services sector tied directly to shelter. Recent data supports this view, with the September 2025 Zillow Observed Rent Index showing that annual rent growth has slowed to 2.8%, its lowest level since early 2024. If this trend continues, it validates the argument that a major component of inflation is already cooling, reducing the need for further policy tightening.
Inflation Expectations and Market Reactions
With inflation expectations seen as “reasonably well anchored,” the Fed has more room to be patient. The University of Michigan’s latest survey from late September 2025 confirms this, showing five-year inflation expectations holding steady at 2.7%. This public confidence allows policymakers to look past any short-term inflation bumps, like the one we saw in the last CPI report, and focus on the underlying disinflationary trend.
For derivative traders, this suggests positioning for a potential decline in long-term interest rates and lower market volatility. We are seeing the market price in these expectations, with CME FedWatch Tool data showing a 65% probability of a rate cut by March 2026. Options strategies that benefit from falling bond yields, such as long calls on Treasury bond ETFs, or selling puts on interest rate futures, could become increasingly attractive.
However, we must also acknowledge the division within the Fed, with some members still warning about persistent inflation pressures. This divergence creates event risk around upcoming FOMC meetings and key data releases like the next CPI report. Traders should consider using options to hedge against unexpected hawkish shifts or to play potential volatility spikes if the expected easing in shelter costs does not materialize.
This dovish tilt is likely to keep pressure on the US dollar while supporting risk assets like equities. The continued climb in the Dow Jones Industrial Average reflects hopes for rate cuts, aligning with this forward-looking policy stance. We should expect currency pairs like EUR/USD to remain buoyant near the 1.1750 level as long as this narrative holds.
