(Ok, not the crypto world, exactly. This is about a central bank digital currency (CBDC,) but that is kinda boring so I used a little clickbait to get you here.)
Should the Federal Reserve issue a CBDC? There has been a movement for the Federal Reserve to get into the game to counteract the use of cryptocurrency by making a CBDC. To that point, Chair Powell recently announced that the Federal Reserve will publish a discussion paper on the benefits and costs of creating a CBDC. Now, luckily the Federal Reserve does not move that fast, so them releasing a paper does not mean that much.
There are plenty of people out there that want to see this happen. Without getting too deep into the discussion, a few of the talking points are:
- CBDC is needed because existing payment services are unreasonably expensive.
- Too few people can access payment systems.
- Existing payment services are too slow.
- The current payment systems are too limited in reach, and that introducing a CBDC would make payment systems bigger, broader, and more efficient.
- Physical currency will disappear.
Interesting that most of the points are solved by crypto, but that is not what this is about. I would say that an article from the Motley Fool summed up one of the better reasons for issuing CBDC. A CBDC would improve efficiency and understanding of what is happening with the currency created.
The Fed can then use that information to tabulate real-time economic data such as the consumer price index, manufacturing activity, and key product sales. This would greatly increase the Fed's ability to accurately adjust the federal funds rate to balance the economy. In the event of a force majeure (i.e., a financial crisis, deadly pandemic, alien invasion, etc.), the Fed could send stimulus in the form of eUSD to all applicable parties. Afterwards, the entity could monitor blockchain transactions for direct insight into how recipients are spending and determine if more stimulus is needed for the recovery.
Here is my concern with the issuance of a CBDC. It takes away a huge safety net that keeps the Federal Reserve out of our business. Under current law, the Federal Reserve offers accounts and payment services to commercial banks. Congress did not establish the Federal Reserve to provide accounts directly to the general public; the Federal Reserve instead works in the background by providing accounts to commercial banks, which then provide bank accounts to the general public
This division of functions between the Federal Reserve and commercial banks reflects an economic truth: that markets operate efficiently when private-sector firms compete to provide the highest-quality products to consumers and businesses at the lowest possible cost.
In essence, this puts the Federal Reserve way too much in the everyday world of the private sector. I know, you are saying, “Hey the Federal Reserve is not part of the government, so you don’t know what you’re talking about if you’re worried about it affecting the private market.” Allow me to retort…BS. If you think the Federal Reserve acts independently of the US Federal Government, well then, please let me have it in the comments section.
Resources:
https://www.fool.com/investing/2021/08/01/should-crypto-investors-be-concerned-about-cbdcs/
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The Fed will not likely be entering the CBDC game. Powell keeps pushing the rhetoric about it to buy time.
Most of the rest of the world will beat the Fed to it.
CBDC help politicians more than the Central Banks.
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You are probably right, their "research" paper may be just a stall and an attempt to look like they are doing something.
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Powell is very good at playing the PR game and tossing the rhetoric out there. He knows how to handle the markets and the politicians.
I think the talk of tapering is just a stall tactic. He is not going to even think about it until he gets another term. Tapering will have adverse market effects, hindering him being reappointed.
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