US will take ‘some time’ to decide on CBDC, Powell says

Fed chair says it must act to prevent inflation expectations rising

Jerome Powell
Jerome Powell

US authorities will take some time to decide on whether to create a central bank digital currency (CBDC), Federal Reserve chair Jerome Powell said.

“We haven’t made any decisions at all,” Powell told the Cato Institute think-tank on September 8. He said the “evaluation process is going to take some time”.

He also said US authorities should regulate so-called stablecoins, and said the Fed had only a limited time to prevent inflation expectations rising.

Powell said the Fed will wait for clear support from the US presidency and Congress before moving forward on a CBDC.

In relation to privacy concerns, he said the Fed does not want the government to see every purchase Americans make in real time. The balance between privacy and law enforcement, Powell said, could be managed in much the same way as it is in the current banking system.

He said unbacked cryptocurrencies do not appear to offer much to the public for use as payments or stores of value. Pressed by the moderator, Powell admitted it could be argued those functions in cryptocurrencies such as ethereum are in the development phase.

The Fed chair said assets describing themselves as stablecoins need to be properly regulated, adding that firms agree. Powell said he does not want to make money yet another consumer product prone to failures and differences in quality.

“We need legislation on this,” said Powell, adding the Fed is not “opposed to this kind of innovation.”

Action on expectations

Powell said his priority was to make sure high inflationary expectations rise, adding the Fed has a limited time to do that. The Fed chair echoed his recent speech at the Jackson Hole conference, saying that history cautions against prematurely loosening rates.

He said the Fed hopes its policy interventions will achieve below-trend growth. This would cause the labour market to get back in “better balance” bringing lower inflation. He said that if we are now living in a world of persistent labour shortages, it will be a “challenging world for companies”.

When asked by the moderator whether the Fed’s mandate should be expanded upon or reduced to just price stability, Powell pushed back. He said the dual mandate has “served the public well” and is generally workable.

Powell said there is not a strong case for changing the mandate. He “would not want to see it narrowed or broadened.” Additional goals, he argued, could threaten the Fed’s independence.

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