While testifying before Congress on Wednesday, Federal Reserve Chairman Jerome Powell offered his most extensive comments yet on the possibility of a central bank digital currency (CBDCs).
He confirmed that the Fed is working on a report for a release around September that will break down the risks and benefits not only of CBDCs but will also "address digital payments broadly" such as crypto-assets and stablecoins.
"We want to begin really a major public consultation across many different groups, including Congress, of course, on a CBDC and also on stablecoins and crypto," he said.
Stablecoins, which are pegged to the price of fiat currencies, were a particular focus, as central bankers around the world point to their rapid rise as a potential systemic risk to the economy.
"If [stablecoins] are going to be a significant part of the payments universe, which we don't think crypto assets will be, but stable coins might be, then we need an appropriate regulatory framework, which frankly we don't have," he said.
When asked about Tether, the world’s third-biggest cryptocurrency, he noted that the need for more regulation was a given.
"It’s very simple," he said. "These are economic activities that are very similar to bank deposits and money market funds, and they need to be regulated in comparable ways."
The chair said crypto in general was at a "critical point" for finding the appropriate regulations.
Rep. Stephen Lynch (D-Mass. 8th District) expressed concerns to Powell about the pace of the Fed’s adoption of digital currencies, given that other central banks, such as China's, are moving ahead more quickly
Powell responded that this report was an acceleration of that decision-making process, but that overall a careful approach was the right one.
"I think it’s way more important to get it right than it is to do it fast," he said.
Lynch also asked if a central bank digital currency could replace the need for private cryptocurrencies.
"I think that may be the case," Powell said. "I think that’s one of the arguments that are offered in favor of a digital currency. That in particular you wouldn’t need stablecoins. You wouldn’t need cryptocurrencies, if you had a digital U.S. currency."
His answer came as crypto enthusiasts are offering up private digital currencies, despite their price volatility, as a potential hedge against rising inflation in the U.S. economy.
Inflation was a hot topic among members of Congress, particularly Republicans, who were not entirely convinced by the Fed’s insistence that recent increases in the consumer price index (5.4 percent in June) were transitory and would work themselves out in the coming months.
Powell also pinpointed the used car industry, which has contributed an outsized proportion of inflation gains.
"It’s just a perfect storm of high demand and low supply. And it should pass," the Fed chair said. "Unless we think there's going to be a multi-year shortage of used cars in the United States, we should look at [high inflation] as temporary."
He did note, however, that the Fed would respond to inflation if it exceeded an average of 2 percent for "some time." When asked directly to define what this meant, Powell demurred.
"It will depend on the path of the economy," he said.
The chair also noted that the economy still has a lot of growing left to do, especially in the area of jobs, saying the economy is more than capable of reaching the 3.5 percent pre-pandemic unemployment rate.
"I think there's every reason to think we can get back to that level," he said.