Federal Reserve Chair Jerome Powell saw a pair of congressional grillings this week that appeared to center on timelines.
In a Wednesday virtual hearing in front of the House Financial Services Committee, Powell estimated the Fed’s long-awaited research paper, meant to "stimulate broad conversation" as to whether and how the central bank should issue and back a digital currency, is slated to surface in September. Powell in May gave the paper a broader "summer" deadline.
The report, Powell said Wednesday, would help the Fed "accelerat[e] that decision process," and public comment would be considered, as well.
But Powell acknowledged Thursday in front of the Senate Banking Committee that he is "legitimately undecided on whether the benefits outweigh the costs or vice versa" regarding a Fed-backed CBDC.
The same perhaps can’t be said of at least one of Powell’s Fed governors. Randal Quarles, the central bank’s vice chair for supervision, in a speech last month, said the potential benefits of a Fed-backed digital currency are "unclear," but the risks may be "significant and concrete." He equated some of the digital currencies driving such exploration to a clothing fad — specifically, parachute pants.
"Bitcoin and its ilk will, accordingly, almost certainly remain a risky and speculative investment rather than a revolutionary means of payment, and they are therefore highly unlikely to affect the role of the U.S. dollar or require a response with a CBDC," Quarles told the Utah Bankers Association, clarifying that he was speaking for himself and not representing the Fed’s view.
A stronger prong driving the innovation is the concern that other countries — particularly China — are far ahead of the U.S. in developing CBDCs, and if the Fed doesn’t join the fray, the dollar may lose its primacy among world currencies.
Powell had long adopted a "wait-and-see" approach, saying he’d rather "get it right" than "be first" on CBDCs.
Lawmakers this week both urged Powell to take caution and criticized the Fed for its "slowness" in developing a digital dollar.
"This is not a riskless proposition," Rep. Patrick McHenry, R-N.C., the House panel’s ranking member, told Powell on Wednesday. "It’s a pretty bold proposition for the Federal Reserve."
Responding to commentary from Rep. Stephen Lynch, D-MA, on the Fed’s enduring digital dollar development timeline, Powell said, "We have a lot of work left to do on the technical side and on the policy side, but a critical part of it is just the public consultation."
Still another lawmaker, Sen. Pat Toomey, R-PA, blasted Powell over what he saw as the Fed chair’s waffling viewpoint.
"During your [House] testimony yesterday, I sensed — what I wasn't sure but thought might be — a change in your tone about the virtues" regarding a Fed-backed digital currency, Toomey said Thursday.
Powell has long said some of his reluctance is rooted in the desire for broad congressional support, a theme he reiterated Thursday. "Ideally, that [support] would take the form of authorizing legislation, as opposed to a very careful reading of ambiguous law to support this," Powell told Toomey.
Stablecoins
There’s much middle ground in digital currencies between cryptocurrencies and CBDCs. The Basel Committee on Bank Supervision and the Bank for International Settlements, in reports last month distinguished stablecoins — digital tokens pegged to traditional currencies such as the dollar — as a separate asset class. While Basel recommended exempting stablecoins from the same harsh risk weighting it suggested for crypto, the BIS called stablecoins "an appendage to the conventional monetary system and not a game-changer," further criticizing them for "attempt[ing] to import credibility by being backed by real currencies."
Powell, in Wednesday’s hearing, compared stablecoins to money market funds or bank deposits "but without the regulation."
"We have a pretty strong regulatory framework around bank deposits, for example, or money market funds. That doesn’t exist really for stablecoins," Powell said. "If they are going to be a significant part of the payments universe — which we don’t think crypto assets will be but stablecoins might be — then we need an appropriate regulatory framework, which frankly we don’t have."
Powell added the September paper will "address digital payments broadly: That means stablecoins, it means crypto assets, it means CBDC."
"That’s one of the arguments that are offered in favor of a digital currency — that particularly, you wouldn’t need stablecoins, you wouldn’t need cryptocurrencies, if you had a digital U.S. currency," Powell said Wednesday.
Second term?
Another aspect of timeline that surfaced this week is Powell’s — particularly his prospects for a second term as Fed chairman. His first expires in February, and typically, presidents signal during the summer whether Fed chiefs will be invited to stay on.
To that end, lawmakers pressed their case for support or change this week.
"We all remember well the spring of 2020, when the world economy almost melted down. It didn’t in substantial part because of the actions that you and your colleagues took. You kept this thing in the middle of the road. Now, some days you had to do it with spit and happy thoughts, but you kept it in the middle of the road," Sen. John Kennedy, R-LA, said Thursday.
On the House side, McHenry said, "What I am certain of is this: You have earned and deserve another term as chair of the Federal Reserve."
The Biden administration has not yet indicated whether Powell will be reappointed. Treasury Secretary Janet Yellen — Powell's predecessor as Fed chair — said the central bank has "done a good job" in recent months but kept mum on her recommendation.
"That’s a discussion I’m going to have with the president," Yellen told CNBC.
Some Democratic lawmakers were more vocal on their desire for a different direction.
"The Fed’s record over the past four years — I see one move after another to weaken regulation over Wall Street banks. And that worries me," said Sen. Elizabeth Warren, D-MA. "There’s no doubt that the banks are stronger today than they were when they crashed the economy in 2008, but that’s the wrong standard: The question is whether or not they are strong enough to withstand the next crisis and whether the Fed is tough enough to protect the American economy and the American taxpayer."
The Senate panel’s chair, Sen. Sherrod Brown, D-OH, ripped the Fed’s move to allow stock buybacks and dividends after supporting banks through "hundreds of billions of dollars" during the pandemic. "It’s time to try something different," he said.
Concerns weren't limited to Democrats. "The Fed’s policy is especially troubling because the warning siren for problematic inflation is getting louder," Toomey said. "Since the Fed has proven unable to forecast the level of inflation, why should we be confident that the Fed can forecast the duration of inflation?"
A Hill staffer who asked to remain anonymous, however, told CNBC the Fed is "an easy target for when things aren’t going perfectly or when the economy isn’t booming.
"It’s really easy to turn to the Fed and say, ‘What are you doing to fix this?’" the staffer said.