fintech
New concerns are emerging within the Fed. The idea is that the digital dollar is secretly rewriting the rules for equilibrium interest rates.
Important points
- Fed Governor Stephen Milan has warned that the adoption of stablecoins could lower the economy’s equilibrium interest rate.
- They argue that current policy is overly restrictive and advocate faster rate cuts.
- Stablecoin reserves tied to U.S. Treasuries could reshape long-term financial conditions.
Federal Reserve Board Stephen Milan I believe The growing use of stablecoins, which are digital tokens backed 1:1 by traditional reserves, could gradually lower the economy’s neutral interest rate, or “R-star.” This is the theoretical interest rate at which monetary policy neither accelerates nor slows down growth.
Rapid increase in liquidity due to digital money
Speaking in New York on Friday, Milan outlined a scenario in which the expansion of stablecoin circulation would add new liquidity to the financial system. Each token issued is backed by a pool of safe assets such as cash or Treasury bills, effectively increasing the amount of loanable funds in the economy.
“When you inject that kind of capital supply into the market, the long-term balance between savings and investment starts to shift,” he noted. “That change in equilibrium naturally results in a lower R-star.”
Simply put, the Fed governor argues, the more stablecoins there are, the more downward pressure there will be on interest rates. Structural changes may require central banks to operate at permanently low policy rates to avoid economic strain.
Voices calling for aggressive interest rate cuts
Milan, who was appointed by President Donald Trump, has repeatedly advocated accelerating rate cuts. He argues that the Fed’s current policy stance is too harsh for the economy to remain below a neutral threshold. His argument links recent changes in trade, tariffs, and immigration policy to a decline in the fundamental equilibrium rate.
“If central banks don’t adjust, they risk being unintentionally tightened and weakened,” he warned. Milan is proposing a series of half-point reductions to realign borrowing costs to align with the lower R-star he envisions.
Expanding role of stablecoins in US finance
Recent US legislation requires stablecoin issuers to back their tokens entirely with cash and Treasury securities. Milan explained that as digital assets proliferate, their relevance will amplify the demand for the Treasury. Although the sector remains small compared to the overall bond market, its expansion could have subtle effects on both liquidity conditions and the Fed’s long-term rate-setting process.
For now, stablecoins represent only a portion of the overall money supply, but in Millan’s view they represent a structural shift that the Federal Reserve can no longer afford to ignore.
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Alex is an experienced financial journalist and cryptocurrency enthusiast. With over eight years of experience covering the crypto, blockchain and fintech industries, he is well-versed in the complex and evolving world of digital assets. His insightful and thought-provoking articles provide readers with a clear picture of the latest developments and trends in the market. His approach allows him to break down complex ideas into accessible and detailed content. Follow his publications to stay up to date on the most important trends and topics.