Federal Reserve Governor Stephen Milan suggested on Friday that a surge in demand for dollar-denominated stablecoins could prompt U.S. interest rates to fall.
In a speech before The Economist in New York, the central banker and President Donald Trump appointee said a flood of dollar-pegged crypto tokens could suppress what economists call “R-star”, or “neutral” interest rates that neither promote nor inhibit growth.
If that happens, the Fed may need to lower its own policy rates to avoid unintentionally slowing the economy, he said.
“Stablecoins have the potential to become a multi-trillion dollar elephant for central bankers,” Milan said. “Stablecoins are already driving demand for U.S. Treasuries and other dollar-denominated liquid assets by buyers outside the U.S., and this demand will continue to grow.”
Citing previous research, Milan said the growth of stablecoins could lower the Fed’s benchmark interest rate by 0.4 percentage points.
In his short time on the Fed’s board, Mr. Millan has advocated for aggressive rate cuts, in part because he believes the neutral rate is much lower than most of his colleagues assume. His latest remarks extend that argument to the world of digital finance, suggesting that the rise of stablecoins could structurally lower borrowing costs over the next few years.
Until now, his arguments have focused primarily on easing inflation and the importance of the Fed not stifling economic growth by raising interest rates. The stablecoin paper adds another wrinkle to this case to facilitate policy.
“Even relatively conservative estimates of the growth rate of stablecoins suggest that the net supply of loanable funds in the economy will increase, which will push down the neutral interest rate,” he said. He added that if the neutral rate is low, “the policy rate should also be lower than it should be to support a healthy economy. The central bank’s failure to cut rates in response to the (R-star) cut is contractionary.”
Milan is expected to retire from the Fed when his term expires in January.
