Impact of Fed’s New Inflation Policy Means on Stablecoins

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By Amee Mehta

Sep 17th, 2020

Anyone who has their news feed full of finance news and insights is aware of Jerome Powell’s speech entitled “New Economic Challenges and the Fed’s Monetary Policy Review”. The announcements in the speech made it widely popular. Powell announced in the speech that the Fed funds rate won’t be budging from the current rate (nearly zero). It will also stick to its current policy of buying Treasury bonds at a rate of $80 billion a month. He added that the Fed would allow inflation to run above the long-term 2% level. To add a little perspective to the picture, the Fed’s total assets experienced a massive increase from March to August. This was due to the purchases of U.S. Treasurys and mortgage-backed securities. It wouldn’t be wrong to say that the Fed’s fund rates are going to stay at zero for a prolonged time now. The inflation rates in theory and practice are fairly apart because both the individuals and businesses tend to hoard their money in economic uncertainty rather than spend it. The banks which are generally keen to be on the lending side are keeping their assets at the Fed. The role of commercial banks to be fractional reservees are reversed and exchanged by the Feds to narrow bank models. The commercial banks won’t be able to offer competitive interest rates on deposits, FDIC bank default protection. This instability in banks’ deposit profound implications for the price of equities, oil, gold and cryptos, and, more. positions will have the So, all the USD-based stablecoins have a chance to increase their capitalization. But the road to have a greater impact on the economy requires stablecoins to compete with bank deposits in terms of advantages. With the help of competitive rates, that are anticipated to come down to a 2% deposit rate. This could provide an attractive hedge to the long-term inflation rate of 2%. But, it is also very likely that fiat-backed cryptocurrencies and digital currencies will accommodate a hefty amount of deposits. The flexibility in payments is said to be a huge factor in the popularity of fiat-backed stablecoins. These currencies will surely be preferred by many businesses and institutions if not retail consumers.