Speech by Governor Miran on stablecoins and monetary policy

Federal Reserve Governor Stephen I. Miran emphasizes that the rapid growth of dollar-denominated stablecoins, particularly under the new GENIUS Act requiring 1:1 backing with U.S. dollar assets, is significantly increasing demand for U.S. Treasurys and other liquid dollar assets. This projected multi-trillion dollar influx, driven largely by foreign appetite for dollar access, is expected to exert substantial downward pressure on the neutral interest rate (r*), potentially by 40 basis points, akin to a 'global saving glut.' Consequently, central banks face implications including a lower equilibrium policy rate, increased probability of hitting the zero lower bound, and a stronger dollar, necessitating careful consideration of monetary policy adjustments and global financial stability.

Analysis

Federal Reserve Governor Stephen I. Miran highlights the rapid growth of dollar-denominated stablecoins, now a significant part of the financial landscape. The recently passed GENIUS Act provides crucial regulatory clarity, mandating U.S.-domiciled stablecoin issuers to maintain 1:1 reserves in safe, liquid U.S. dollar assets, primarily U.S. Treasurys. This legislative framework is expected to solidify stablecoins' role within the payment system and boost their adoption.

This regulatory clarity and strong global demand for dollars are projected to drive a substantial increase in demand for U.S. Treasury bills and other dollar-denominated liquid assets. Forecasts suggest stablecoin uptake could reach $1 trillion to $3 trillion by decade-end, potentially adding $2 trillion to $4 trillion in foreign demand for dollar assets. This influx is anticipated to exert significant downward pressure on the neutral interest rate (r*), with some estimates suggesting a 40 basis point reduction, mirroring aspects of a "global saving glut."

A lower r* implies a reduced equilibrium policy rate, increasing the likelihood of central banks encountering the Zero Lower Bound (ZLB) and limiting their accommodative capacity. Furthermore, increased foreign demand for dollar assets via stablecoins could strengthen the U.S. dollar, impacting trade and inflation dynamics. This incremental dollarization may also reduce the shock-absorbing benefits of floating exchange rates, potentially increasing global business cycle volatility.

The primary driver for this increased demand is the untapped foreign appetite for dollar assets in jurisdictions with limited access, rather than disintermediation of the U.S. domestic banking system. This shift underscores a structural change in global dollar access and its profound implications for U.S. monetary policy formulation and financial market stability.

Key Decisions for Investors

• Monitor for sustained downward pressure on the neutral interest rate (r*) and long-term bond yields, driven by stablecoin-induced demand for U.S. Treasuries.
• Assess the potential for a stronger U.S. dollar due to increased foreign demand for dollar assets, impacting currency exposures and international investment strategies.
• Consider the implications of a potentially lower equilibrium policy rate and increased risk of the Zero Lower Bound (ZLB) for future monetary policy effectiveness and asset pricing.