Federal Reserve Governor Stephen Miran on Friday proposed that the increasing demand for stablecoins pegged to the U.S. dollar could potentially bring down U.S. interest rates. Addressing economists in New York, Miran, who was appointed by former President Donald Trump, explained that the surge in dollar-denominated crypto tokens might lower 'r-star'—the neutral rate of interest that neither fosters nor hinders economic growth. Consequently, the Fed might consider cutting its policy rate to avoid inadvertently slowing down the economy.
"Stablecoins may become a multitrillion-dollar elephant in the room for central bankers," Miran stated. He pointed out that stablecoins are already boosting the demand for U.S. Treasury bills and other dollar-denominated assets from international buyers, a trend likely to continue.
Referring to earlier research, Miran suggested that the growth of stablecoins could potentially reduce the Fed's benchmark rate by 0.4 percentage points. During his tenure at the Fed, Miran has supported substantial rate cuts, arguing that the neutral rate is significantly lower than believed by many of his colleagues. His recent insights extend this argument to the digital finance realm, suggesting the proliferation of stablecoins could undercut borrowing costs in the long term.
Historically, Miran's arguments have centered around curbing inflation and ensuring that interest rates do not stifle economic progress. His views on stablecoins introduce a new dimension to calls for more lenient monetary policy.
"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 noted. If this neutral rate is indeed lower, "policy rates should also be lower than they would otherwise be to support a healthy economy," Miran asserted. He warned that the Fed's failure to lower rates in response to falling r-star could be contractionary.
Miran's tenure at the Federal Reserve is expected to conclude in January, upon the expiration of his interim term.