While it may not make it to the finished coronavirus economic stimulus and support package now being weighed in Congress, there is a push from some legislators to give the Federal Reserve a new tool some believe could radically reshape how it conducts monetary policy.
At issue are so-called digital dollars and the accounts that would hold them. Separate House and Senate bills propose creating these two things as part of a broader effort to reduce the shock of the economic shutdown related to limiting the spread of the coronavirus.
These Fed “digital dollar” accounts would be set up as a way to speed payments to households that need support. As things now stand, the U.S. government lacks the infrastructure to disperse payments widely, and given the nature of the current crisis, speedy action is critical.
The central bank has already taken bold action to support the financial system, including slashing short-term rates to near zero, but almost all of its actions have been aimed at banks and companies. Households have yet to receive any meaningful support.
In the longer run, Fed accounts could also help make monetary policy more powerful and help it bypass a fickle financial system and head right to Main Street. Instead of the Fed taking action to influence market rates, which can be a fraught process, it could offer interest-bearing accounts directly to the public. Then, by changing rates at that level, or even straight up adding Fed-created money to the accounts, it could influence economic decision-making at the household level.
Fed accounts “would be a very significant improvement” in getting money speedily to those who need it most, said Andrew Levin, an economics professor at Dartmouth College who has called for the Fed to launch a digital currency.
Prof. Levin says that in the current situation, it doesn’t matter if these Fed accounts got stimulus funds from the Treasury Department or through money printing directly at the Fed. The main issue is just getting money out the door quickly in a fast-moving crisis, he said.
Even if Fed digital accounts aren’t in place to deal with the current crisis, they can build out the tool kit for dealing with future stress, supporters say.
Julia Coronado, of MacroPolicy Perspectives LLC, along with Simon Potter, the former manager of the New York Fed’s markets desk, wrote in a forthcoming paper about the benefits of the central bank having digital accounts available to everyday people. “Boosting consumer demand directly is likely to be more effective and have better distributional implications than the current approach of boosting asset prices” through asset buying, and “it can be implemented faster than discretionary fiscal stimulus,” they wrote.
The debate over an official Fed dollar, distinct but equivalent to the dollar that now exists, has been brewing for several years, partly in reaction to private systems such as bitcoin. To some extent, Fed digital dollars are as much about payment system infrastructure because most dollars are already electronic.
If legislation does create official Fed digital money, the central bank would have something it has yet to seek actively, even as other central banks are trying out their own digital systems. In February, Fed Chairman Jerome Powell said that there are privacy concerns around a digital currency offered by the central bank and that Americans still have a strong preference for cash.
(Michael S. Derby, WSJ)