Federal Reserve Governor Stephen Miran indicated on Friday that the escalating demand for stablecoins pegged to the U.S. dollar could drive American interest rates downward. Addressing a group of economists in New York, Miran, a central bank official appointed by former President Donald Trump, discussed how the influx of dollar-denominated crypto tokens might suppress what economists call 'r-star,' or the 'neutral' interest rate that neither stimulates nor restricts economic growth.
He suggested that if this scenario occurs, the Federal Reserve might need to decrease its policy rate to prevent an unintentional economic slowdown. 'Stablecoins may become a multitrillion-dollar elephant in the room for central bankers,' Miran noted. He emphasized that stablecoins are already boosting the demand for U.S. Treasury bills and other dollar-denominated liquid assets globally, and this trend is expected to continue.
Referring to previous studies, Miran mentioned that the stablecoin expansion could reduce the Fed's benchmark rate by 0.4 percentage points. Throughout his brief tenure at the Fed, Miran has been a proponent of substantial rate cuts, partly due to his belief that the neutral rate is substantially lower than what most of his peers estimate. His recent comments bring this argument into the realm of digital finance, proposing that the rise of stablecoins might structurally decrease borrowing costs in the long term.
Previously, Miran's advocacy centered on curbing inflation and highlighting the importance of the Fed avoiding economic hindrances through high rates. The incorporation of stablecoin dynamics adds a new dimension to his argument for lenient monetary policies.
'Even relatively conservative estimates of stablecoin growth imply an increase in the net supply of loanable funds in the economy that pushes down' the neutral rate, he remarked. If the neutral rate is reduced, he continued, 'policy rates should also be lower than they would otherwise be to support a healthy economy. A failure of the central bank to cut rates in response to a reduction in [r-star] is contractionary.'
Miran is scheduled to leave the Federal Reserve in January, as the term he is completing is set to expire.