Implications of Federal Open Market Committee (FOMC) convention on CRYPTO

The Federal Open Market Committee (FOMC) is the monetary policy-making body of the US Federal Reserve System. The FOMC meets eight times a year to review economic and financial conditions, determine the appropriate stance of monetary policy, and assess the risks to its long-run goals of price stability and sustainable economic growth.

One of the topics that has been attracting attention in recent FOMC meetings is the impact of cryptocurrencies on the US economy and financial system. Cryptocurrencies are digital assets that use cryptography to secure transactions and control the creation of new units. They operate independently of central banks and governments, and are often seen as an alternative to traditional fiat currencies.

The FOMC has expressed both interest and concern about cryptocurrencies, especially in relation to their potential implications for monetary policy, financial stability, and consumer protection. In this blog post, we will explore some of these implications and discuss how they might affect the future of crypto.

Monetary policy implications

One of the main functions of the FOMC is to set the target range for the federal funds rate, which is the interest rate at which banks lend reserve balances to each other overnight. The federal funds rate influences other short-term interest rates, such as those on Treasury bills and commercial paper, and affects the cost and availability of credit in the economy.

The FOMC adjusts the federal funds rate in response to changes in economic conditions and inflation expectations, with the aim of achieving its dual mandate of maximum employment and price stability. The FOMC also uses other tools, such as quantitative easing and forward guidance, to provide additional stimulus or restraint when needed.

However, some analysts have argued that cryptocurrencies could pose a challenge to the effectiveness of monetary policy, by reducing the demand for central bank money and weakening the transmission mechanism of interest rate changes. For example, if more people use cryptocurrencies as a medium of exchange or a store of value, they might reduce their holdings of US dollars or other fiat currencies, which could reduce the demand for reserves and lower the federal funds rate below its target range.

Alternatively, if more people borrow or lend in cryptocurrencies, they might bypass the traditional banking system and reduce the sensitivity of credit conditions to changes in the federal funds rate.

These scenarios are still hypothetical, as cryptocurrencies currently represent a very small fraction of global transactions and financial assets.

Moreover, cryptocurrencies face significant barriers to widespread adoption, such as volatility, scalability, regulation, security, and trust issues. However, as technology evolves and innovation continues, these barriers might be overcome or mitigated in the future, which could increase the popularity and use of cryptocurrencies among consumers and businesses.

Therefore, the FOMC has been monitoring the developments and trends in the crypto space closely, and has been exploring the potential benefits and risks of issuing a central bank digital currency (CBDC), which is a digital form of fiat money that is issued and backed by a central bank.

A CBDC could offer some advantages over cryptocurrencies, such as legal tender status, price stability, lower transaction costs, faster settlement, greater accessibility, and enhanced security. A CBDC could also complement or supplement cash and bank deposits as a means of payment and a store of value.

However, a CBDC could also entail some challenges and trade-offs for monetary policy, financial stability, and consumer protection. For example, a CBDC could affect the demand for reserves and bank deposits, which could alter the structure and functioning of the financial system. A CBDC could also raise questions about privacy, cybersecurity, governance, and regulation. A CBDC would require careful design and implementation to ensure that it does not compromise the objectives and independence of the central bank.

The FOMC has not made any decision on whether or not to issue a CBDC, but has been conducting research and experimentation on various aspects of CBDCs, in collaboration with other central banks and international organizations. The FOMC has also been engaging with various stakeholders, such as lawmakers, academics, industry participants, and the public, to solicit feedback and input on this important topic.

Financial stability implications

Another function of the FOMC is to promote financial stability, which is defined as a condition in which the financial system can withstand shocks and continue to function effectively in support of economic activity.

The FOMC monitors and assesses various indicators and sources of financial stability risks, such as asset valuations, leverage, funding.