Why Lower Immigration Leads to Lower Interest Rates
When economists talk about immigration, they usually focus on jobs, wages, or fiscal costs. Federal Reserve Governor Stephen Miran wants to add another dimension: interest rates.
In his first speech since joining the Fed, Miran argued that shifts in immigration are one of the most powerful forces pushing down inflation and the economy’s “neutral” rate of interest—the level of rates that keeps growth steady without stoking inflation. If net immigration falls sharply from the pre-pandemic norm of about one million people a year to near zero, he estimates, rent inflation will slow by roughly a percentage point each year. That alone would shave several tenths off overall inflation, making today’s policy stance far tighter than it looks.
The scale of change is already visible in the data. According to Miran, roughly 1.5 million immigrants left the country in just the first half of 2025—suggesting the U.S. could see its first sustained period of negative net migration in generations.
How Immigration Pushes Up Housing Costs
Miran’s reasoning builds on the work of Albert Saiz, an economist at MIT. In a series of studies in the 2000s, Saiz documented how immigration affects local housing markets. By comparing U.S. metropolitan areas that received different levels of immigrant inflows, he found that rents tend to rise in proportion to the number of immigrant occupants—a relationship economists call “unit elasticity.” Put simply: a one percent increase in a city’s population from immigration pushes rents up by about one percent.
The mechanism is straightforward. Immigrants tend to arrive in clusters, concentrating demand for housing in particular cities. Because new housing supply is slow to respond, the influx shows up quickly in rent prices. Later work has shown the same dynamic in other countries, and that immigrant-headed households are more likely to rent than native-born households, intensifying the effect.
By invoking Saiz, Miran is arguing that immigration levels are not just a long-run demographic issue—they matter immediately for rent inflation, which in turn carries outsize weight in the consumer price index. With net immigration sliding, the rental market loses a powerful source of upward pressure.
Our Fate Is in R* and Our Children
But rents are only part of the story. Slower immigration also means slower population growth—at least in the short to medium term—which reduces the economy’s demand for capital and nudges the neutral rate lower. At the same time, tariff revenues and deficit-reducing tax policies are raising national saving. In economic models, more saving relative to investment pushes the neutral rate down. Deregulatory and energy policies may offset some of this by boosting productivity, but Miran sees the net effect as a lower speed limit for the economy.
That “speed limit” is what economists call r*. Think of r* as the economy’s natural cruising speed. When the Fed sets rates above this level, it’s like driving with the brakes on—growth slows and unemployment rises. Set rates below it, and the economy overheats with rising inflation. Miran’s calculations suggest r* is now low enough that the Fed’s benchmark rate should be in the mid-two percent range—two full points below where it stands today. Keeping rates higher risks, in his words, “unnecessary layoffs and higher unemployment.”
The argument puts Miran at odds with his Fed colleagues, who have been more cautious about cutting rates. He explicitly acknowledged that his views diverge from other Federal Open Market Committee members—unusual candor for a central banker.
While Miran’s argument is persuasive about the near-term, it might not hold for much longer time horizons. A growing economy, especially one with lots of opportunity for young men, will tend to boost population growth. If the borders are open to immigrants, much of that growth will come from immigrants. If immigration is restricted, the fertility of the native population rises as younger people take advantage of their improved prospects by marrying earlier and having more children, as the work of Richard Easterlin showed decades ago. So, while you can hold down population growth with immigration restrictions, lowering the neutral rate, in the short-term, eventually fertility restores growth to an equilibrium. Of course, this takes quite a long time to get going since there is what economists might call a “long lag” between initial household formation and the entry of subsequently produced new workers into the labor force. In the long run, the population rises.
The idea that demographics shape interest rates is not new. Before the pandemic, many analysts warned that developed economies might drift toward Japan’s low-rate equilibrium as fertility fell and aging populations slowed labor-force growth. In Miran’s analysis, reduced immigration accelerates that process in the United States. Less population growth means less demand for housing and capital, lower rents, and a lower neutral rate.
The implications are striking. For years, debates about monetary policy centered on inflation expectations, wage growth, or fiscal stimulus. Miran suggests that border and budget choices have already lowered the economy’s neutral rate—and that monetary policy needs to recognize this shift. If he is right, the Fed is not just mildly restrictive. It is significantly tighter than it realizes.
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