How the Fed Is Thinking about Digital Currencies | Lord Abbett
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Economic Insights

Lord Abbett Portfolio Manager Leah Traub discusses a potential digital currency playbook for the U.S. Federal Reserve.


Air Date: August 16, 2021

Hi this is Leah Traub, Partner and Portfolio Manager in taxable fixed income.

Interstitial: The Fed & Digital Currencies

So Chairman Powell of the {U.S.] Federal Reserve addressed the Central Bank digital currency question that I had spoken about several weeks ago in front of both the House and the Senate committees in the middle of June, and he was basically asked “will the Fed you know [be] interested in issuing as underlying digital currency”?

His answer was very ambiguous. It sounds like the Fed has not decided, one way or another, whether they are ready to do it, and he actually did put some of the responsibility back on Congress to say that the Fed was looking for their authorization.

Before doing it now, however, what got a lot of attention in the market was that he did talk about crypto currencies and what's called the stablecoins that are out there. Already in the private market, you can tell that the Central Bank is getting a little bit concerned about the private creation of the stablecoins that are linked to the [U.S.] dollar. So these are coins that are going to be explicitly backed by the dollar. This isn't like a brand new currency, so that means that it's completely in the Fed’s wheelhouse because they care about money supply, right, they care about how many dollars or dollar-linked assets are available in the market.

And if you can have a private entity kind of create his own coin and promise to link it to the dollar, then that's that becomes the Federal Reserve's concern because I, that is an expansion of the monetary policy that may not be they may run counter right to the type of monetary policy that the Central Bank wants to achieve. So that is the main reason that the Fed is actively researching their own digital currency that they think could supplant a lot of these private ones we're seeing in the market because they can have much easier distribution--much wider distribution—as it's backed directly by the Federal Reserve, and therefore they can control it so as I’ve said previously.

I do think we will be seeing a central bank digital currency within the next you know five years--it's going to be out there, I do think it's happening; we're seeing it happen in other countries as well.

And I do think that you know that this is something that will be part of our future it's not a huge step from some of the digital payments that were already. You know that they're already using you know currently when you pay for things with your Apple Pay or whatever on your phone So watch out for it, there will be a lot more to come.


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