On Wednesday, March 23, Federal Reserve Chairman Jerome Powell discussed the need for consumer protection when it comes to digital currencies. The Bank for International Settlements, an organization that includes central bankers from around the world, organized the panel at which Powell spoke. There are two kinds of new technologies that Powell is concerned with: stablecoins and central bank digital currencies.
The former are a kind of cryptocurrency tied to a commodity or the dollar; the latter are government-issued digital forms of currencies, like the U.S. dollar. Back in Jan., the Fed released a study on stablecoins that identifies the form of currency as “a possible breakthrough innovation in the future of payments.” The Fed understands that stablecoins have the potential to significantly impact the banking system, both on traditional banking and credit provision. As for digital currencies, the Fed is researching the topic but has not decided whether to issue their own.
Although Powell did not provide much detail as to the content of these regulations, he did say that these digital transactions should be regulated the same as other transactions executed by banks. Powell is particularly concerned with the perceived lack of consumer awareness of the risk associated with cryptocurrency: many popular investments lack government protection of losses. The rate of adult Americans who invest in cryptocurrency is 16 percent and it seems that the hype is only growing, meaning that more Americans are going to be exposed to unregulated risk by investing in crypto in the coming years. That is, however, unless the government develops more robust laws and regulations concerning digital currencies.
Besides personal loss and privacy concerns, Powell discussed how cryptocurrency assets have been used for “illicit activity,” such as money laundering. On top of that, Sen. Elizabeth Warren has expressed concern regarding crypto use and evading sanctions on Russia.
Pictured above is Federal Reserve Chairman Jerome Powell. Powell led this week’s FOMC meeting, forward-signaling the Fed’s monetary policy strategy and lending clarification to eager market makers.
Since the Federal Reserve’s inception in 1913, the central bank has made a profound impact on the nation’s commercial banking sector, monetary policy and the world. The Federal Reserve, or the Fed, operates as our nation’s commercial banking regulator, monetary policy interventionist and financial stabilizer. The Fed is made up of 12 member banks which assist an assigned geographic area around the country and help with banking services and compiling data in the area. The Fed’s main goals are price stability, maximum employment and maintaining moderate long-term interest rates.
The Fed meets eight times a year with members from other area banks known as the Federal Open Market Committee (FOMC). The FOMC consists of 12 members, which come from the Board of Governors of the Fed and Reserve Bank presidents. The FOMC is responsible for managing the country’s money supply.
The current chairman of the Fed is Jerome Powell. Powell has served in this role since 2018. An alumnus of Princeton and Georgetown, Powell worked shortly in investment banking in his early career and later went on to start working in public service under Former President George H. W. Bush. Since his time at the Fed, Powell has neither been described as either a dove, which is a policymaker interested in low unemployment and low interest rates, nor a hawk, which is a policymaker more concerned with stifling inflation. Instead, Powell has been described as a major mediator: one to find a consensus in monetary policy and the economy. He has been known to listen to many different members of Congress’ views on the economy.
The FOMC met live today at 2:30 p.m. to discuss the economy’s recovery. With three vaccines in full swing and a new stimulus package passed, many of the challenges induced by the coronavirus pandemic are seeming smaller, and recovery has been top-of-mind among regulators. As a result, speculators are expected to grow more eager to reenter the market after a tumultuous year.
Many investors are concerned with the recent rise in treasury yields and inflation. Powell has discussed inflation a few weeks ago, and he does not believe inflation to be a major concern. As expected, he reiterated this point during today’s FOMC meeting. The Fed’s Summary of Economic Projections in December estimated GDP to be 4.2 percent, unemployment to be at 5 percent, and core inflation to be at 1.8 percent for 2021. Some believe these estimates rely on optimistic outcomes regarding vaccine rollouts and business reopenings.
Market conditions indicated investors were not expecting a change in interest rates announced at the meeting, and there was none. Powell made it clear that the Fed would employ ample forward signaling before implementing any drastic, market-moving changes such as a tapering of treasury yields. In a Q&A with reporters, Powell made it clear that there needs to be significant progress made in economic recovery to consider the action. Currently, the federal funds target rate (the rate commercial banks lend to each other) is set from 0 to 0.25 percent. This was set low by the Fed to stimulate credit markets and encourage lending to businesses afflicted by the economic shutdown that occurred last March in response to spiking COVID-19 transmission rates. As we recover from the pandemic, the economy’s fate will be placed not only in the hands of the FOMC and the Fed but in the average American’s consumer confidence and their ability to spend money. A recovery in consumer confidence followed by an economic recovery will likely prompt the Fed to change course, when that will happen remains an uncertainty.
Chairman of the Federal Reserve Jerome Powell listens during a hearing before the Senate Banking Committee in December 2020.
On Tuesday, Feb. 23 at 11 a.m. EST, the chair of the Federal Reserve, Jerome Powell, testified before the Senate Banking Committee regarding the central bank’s semi-annual Monetary Policy Report. The Committee’s chair, Senator Sherrod Brown (D-OH) began the session with opening remarks about the current state of economic affairs. Senator Brown made it clear from the beginning that he is in favor of the Fed using any monetary tools it sees fit to manage inflation and unemployment, stating, “most people are not worried about doing too much to get through this pandemic, they’re worried about doing too little.” Further, he recalled remarks from Janet Yellen, the treasury secretary, who stated that if the Fed doesn’t do more by way of monetary policy, we risk a “permanent scarring” of our economy and our future.
Ranking member Senator Pat Toomey (R-PA) disagreed with Senator Brown, stating, “the last thing we need is a massive multimillion-dollar spending bill.” Senator Toomey was chiefly concerned with inflation and urged Powell to roll back the Fed’s holdings of treasury securities and agency mortgage-backed securities in order to avoid uncontrollable and unwanted inflation. Senator Toomey stated that most American households are in better financial positions now than they were before the pandemic. He stated that in his opinion, the last two recessions were caused by asset bubbles that burst. In 2001, it was the stock market, in 2008, the mortgage credit market. Additionally, Senator Toomey believes that monetary policy contributed a great deal to the formation of those bubbles.
He also remarked that there is a link between record amounts of liquidity and unprecedented asset valuations, like those of GameStop and Bitcoin, as of late. Across the board, Senator Toomey stated, there are elevated asset prices and signs of emerging inflation. He asked Powell if he believes there is a link between the liquidity the Fed has been providing and some of these unprecedented asset prices, to which Powell responded, “there is certainly a link.” Despite this, Powell and the Fed plan to continue the bond-buying program “at least at its current pace until we make substantial progress toward our current goals.”
Powell presented his testimony in two parts: a review of the current economic situation and the Fed’s plans for monetary policy moving forward. Powell stated that the sectors most adversely affected by the resurgence of the virus are the weakest. Household spending on services remains low, especially in the hard-hit sectors of leisure and hospitality. However, household spending on goods picked up in January. Moreover, the housing sector has “more than fully recovered from the downturn.” Regarding the labor market, Powell stated that the pace of improvement in the labor market has slowed and the unemployment rate remained elevated at 6.8 percent in January. Participation in the labor market is notably below pre-pandemic levels.
Moreover, Powell stated that “those least able to shoulder the burden [of the pandemic] have been hardest hit,” citing low wage workers, African Americans, Hispanics and other minority groups as the most affected. During the questioning portion of the hearing, Senator Bob Menendez (D-NJ) explained the varying unemployment rates by race: in January, the unemployment rate among the black population was 9.2 percent; among Hispanics, 8.6 percent. The unemployment rate among white people was 5.7 percent. Additionally, the Black labor force exit rate increased dramatically while the white labor force exit rate returned to pre-pandemic levels, suggesting that the Black unemployment rate is misleadingly low compared to the white rate. Senator Menendez got Powell to agree that minority families are bearing the brunt of the damage caused by the pandemic, “along with those at the lower end of the income spectrum.”
Regarding inflation, Powell stated that there were large declines in the spring, but consumer prices partially rebounded last year. Powell also stated that as the very low inflation readings from last March and April drop out of the 12-month calculation on inflation, we should expect readings on inflation to move up. This is called the base effect and it should not be a cause for concern. Powell mentioned that overall, inflation remains below the 2 percent long-run objective. He stressed that the 2 percent goal is an average, so periods of lower-than-average inflation should be followed by periods with inflation rates greater than 2 percent.
In his overview of the monetary policy report, Powell emphasized that maximum employment is a broad and inclusive goal, so policy decisions should be informed by an assessment of the shortfalls of employment from its maximum level, rather than deviations from its maximum level. Furthermore, Powell mentioned that actions taken by the Fed in the early months of the pandemic have constrained their main policy tool by the lower bound. In other words, the Fed has been lowering interest rates in unprecedented ways since even before the start of the pandemic, so their ability to use lowering interest rates as a monetary policy tool is weakened.
If lowering interest rates isn’t really much of an option anymore, what will the Fed do? Simply put, the Fed will do what it has been doing throughout the pandemic: increase holdings of securities at least at their current pace. The Fed will closely monitor inflation; Powell stated that “well-anchored inflation expectations will enhance our ability to meet both our employment and inflation goals.” Powell assured Congress that the Fed “will continue to clearly communicate our assessment of progress toward our goals well in advance of any change in the pace of purchases.”