Fed Says Tapering May Start This Year, Stablecoins Pose Threat

The Federal Reserve may start tapering asset purchases and scale back its easy-money monetary policies this year, minutes from the July Federal Open Markets Committee (FOMC) meeting show. 

Most Fed officials said that the central bank’s inflation expectations have been sufficiently met and there has been progress made toward reducing unemployment. 

“All participants assessed that the economy had made progress toward the Committee’s maximum-employment and price-stability goals since the adoption of the guidance on asset purchases in December,” the minutes read. “Most participants judged that the Committee’s standard of substantial further progress toward the maximum-employment goal had not yet been met.” 

In terms of tapering execution, committee members, who met in late July, vary in how they think about the timing, pace and type of tapering.

In terms of bond purchases, most participants “saw benefits in reducing the pace of net purchases of Treasury securities and agency mortgage-backed securities proportionally,” the minutes revealed. Other members expressed interest in reducing MBS purchases more quickly than Treasuries.

“Several participants commented on the benefits that they saw in reducing agency MBS purchases more quickly than Treasury securities purchases, noting that the housing sector was exceptionally strong and did not need either actual or perceived support from the Federal Reserve in the form of agency MBS purchases or that such purchases could be interpreted as a type of credit allocation,” the minutes read.

The risk of stablecoins

Committee members also discussed stablecoins in July. Officials remarked that these “new financial arrangements” lack structural maturity and exist within an “underdeveloped regulatory framework.”

“A few of these participants highlighted the fragility and the general lack of transparency associated with stablecoins, the importance of monitoring them closely, and the need to develop an appropriate regulatory framework to address any risks to financial stability associated with such products,” the minutes noted.

Fed Chairman Jerome Powell has said in the past that the establishment of a central bank-backed digital currency would make the market less reliant upon stablecoins.

“You wouldn’t need stablecoins, you wouldn’t need cryptocurrencies if you had a digital US currency,” Powell said during testimony before the House financial services committee in July. “I think that’s one of the strong arguments in its favor.”

The FOMC meets next in late September. Investors are also awaiting the Jackson Hole Economic Policy Symposium on August 26-28, when central bankers, finance ministers, academics, and financial market participants from around the world will meet to discuss issues related to economic policy.

This story was updated at 3:42PM EST.

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