The Federal Reserve Bank in the U.S., the agency responsible for monetary policy and a host of related duties, produces two semi-annual reports each year to update the Congress on its activities. Its chairman, Jerome Powell, must then sit before Congress for two days to review the report and answer any queries that any attending Congressman might have. These sessions are generally cut and dried affairs, dealing with arcane financial matters and potential economic impacts, but this time around, Mr. Powell was actually queried about cryptocurrencies and their impact on policy.
The hearing went its normal course for the first day. Powell dealt with issues related to inflation, slow economic growth, and risks on the global scene that might impact the U.S. economy. In Powell’s own words:
Potential downside risks to international financial stability include a downturn in global growth, political and policy uncertainty, an intensification of trade tensions and broadening stress in emerging market economies. Volatility in financial markets and increased concerns about global growth made the appropriate extent and timing of future rate increases more uncertain than earlier.
The important message was that the Fed was going to be “patient” going forward. There would be no more interest rate hikes until data suggested that its normalization policy should be resumed. Once more, in Powell’s own words:
When I say we’re going to be patient, what that really means is we’re in no rush to make a judgment about changes in policy. We’re going to allow…the data to come in. I think we’re in a very good place to do that.
The crypto “surprises” occurred on Day Two. The first crypto related question, perhaps more in the form of a statement, came from Rep. Warren Davidson from Ohio. His concern was that innovation might be suffocated by what he called the lack of “regulatory clarity”. He felt more clarity would be a good thing, help the nascent crypto industry to thrive, and go a long way to eliminating fraud, which has been pervasive in the Initial Coin Offering arena.
Davidson’s next point was more curious and illustrated a level of understanding as to how Bitcoins in circulation are controlled tightly, as opposed to our national fiat currency money supply, which has been expanded greatly over the past few decades. The Fed has long had an inflation target of 2%, but cryptocurrencies typically “have pre-determined inflation rates that can never be increased.” For example, Bitcoin has a scheduled inflation rate for 2020 of 1.8% and should actually decline from that base over the subsequent four year period.
Later in the session, Rep. Barry Loudermilk asked if crytocurrencies had factored into any Fed decisions regarding monetary policy. Powell’s responses were measured, but to paraphrase his comments:
Digital currencies do not have a significant effect on the monetary policy in the short term. The reason why the effect is considered minimal is that people are currently not using these tokens for making purchases in the economy… Since the digital currencies have not yet broken into the mainstream economy, they pose no significant effect on the direction that the inflation rates of the American and global economies take.
And there you have it from the nation’s Number One banker – cryptocurrencies are not significant enough in the near term to influence monetary policy or have a direct or even indirect impact on inflation estimates. As for regulatory clarity, the chairman neatly sidestepped this issue, but he is fully aware that there are a number of initiatives in process in other agencies to achieve this purpose, independent of his offices.