Preface

Federal Reserve Governor Stephen Miran has drawn attention to the potential influences of rapidly growing stablecoins on U.S. interest rates. His insights suggest a possible long-term structural impact on the American economy. Miran, who was appointed by former President Donald Trump, addressed a gathering of economists to discuss how these digital assets, particularly those pegged to the dollar, could affect key economic indicators such as the 'r-star' or neutral interest rate.

Lazy bag

Key Takeaway: The surge in demand for stablecoins might necessitate a drop in Fed's policy rates to prevent economic slowdown. Miran emphasizes significant implications for central bank policies.

Main Body

In a detailed address, Fed Governor Stephen Miran elaborated on the burgeoning impact that stablecoins, particularly those anchored to the U.S. dollar, could have on the nation's economic framework. He indicated that this growing trend might lead to a decrease in the natural interest rate, commonly known as 'r-star', which represents the equilibrium rate not conducive to either speeding up or slowing down economic growth. A lower 'r-star' suggests that the Federal Reserve might need to adjust its policy rates downward to prevent unintended restrictive effects on the economy.

Miran pointed out that the increase in stablecoins is notably affecting the demand for U.S. Treasury bills and other dollar-oriented liquid assets from international buyers. This expanding demand could potentially push the Fed's benchmark rates down by approximately 0.4 percentage points. His analysis aligns with previous research exploring the financial implications of digital assets and their capacity to alter lending and borrowing paradigms significantly.

Since joining the Fed, Miran has consistently advocated for aggressive rate cuts, maintaining that many of his peers underestimate the true level of the neutral interest rate. His latest observations suggest that digital finance developments, particularly the rise of stablecoins, reinforce his standpoint on maintaining lower borrowing costs. This perspective underscores the need for the Fed to remain flexible and responsive to changes in the financial landscape brought by technological advancements.

He warned that even conservative growth estimates for stablecoins imply a substantial increase in the economy's net supply of loanable funds, driving the neutral rate downward. Thus, policy rates also need to be adjusted lower than current estimates to sustain economic health. A failure to respond to this decrease in 'r-star' could have contractionary effects, potentially stunting economic growth.

Miran is slated to depart from the Federal Reserve in January at the completion of his interim term, leaving behind a critical discourse on the intersection of digital currencies and macroeconomic policy.

Key Insights Table