Federal Reserve Insights on Stablecoins and Interest Rates

U.S. Federal Reserve President Stephen Milan mentioned on Friday that if stablecoins gain widespread acceptance, central banks might need to maintain lower short-term interest rates than previously expected.

Milan highlighted that even modest projections of stablecoin growth could lead to a rise in the availability of loanable funds, which, in turn, would decrease the neutral interest rate in the economy. This statement was part of a speech he was set to deliver at the 2025 BCVC Summit in New York.

He explained that neutral interest rates, or R-stars, represent short-term rates that don’t stimulate or slow economic activity. Milan suggested that if R-star remains low, then policy interest rates should similarly decrease to keep the economy on track. He cautioned that failing to adjust interest rates in response to a lower R-star could have contractionary effects.

Stablecoins, which are cryptocurrencies pegged to a stable value like the dollar, are becoming more integrated into the financial landscape despite the broader crypto market’s volatility. Milan observed that dollar-linked stablecoins would make the dollar and its assets more appealing, influencing the U.S. economy overall.

“These stablecoins bolster the dollar’s dominance by allowing more individuals globally to hold and transact with what is considered a reliable currency,” he noted.

Milan also pointed out that stablecoins are already increasing demand for U.S. Treasuries and other liquid dollar-denominated assets from international buyers, a trend he anticipates will continue. This increased demand could lower borrowing costs for the U.S. government.

Furthermore, it is likely that stablecoins will enhance the dollar’s global standing, and he indicated that monetary policy may adjust in response to this effect, particularly concerning other factors that influence the Fed’s commitments to price stability and maximum employment.

While he addressed stablecoins, Milan didn’t delve into the immediate outlook for monetary policy in his prepared comments. Currently, he is on a controversial leave from his position, having previously supported aggressive interest rate cuts.

Milan drew parallels between the possible effects of stablecoin adoption and the era preceding the Great Financial Crisis two decades ago, when a global savings excess contributed to a prolonged period of low interest rates in the U.S. He suggested that a similar situation could result in sustained low Fed interest rates, raising the possibility of the Fed targeting near-zero rates.