Analysts at the U.S. Federal Reserve System are examining the potential impact of the retail CBDC on the country’s monetary policy, focusing on possible risks to the U.S. financial system’s stability.
The Federal Reserve System published a working paper titled Retail CBDC and U.S. Monetary Policy Implementation: A Stylized Balance Sheet Analysis. In it, analysts examine in detail the options for the retail CBDC’s possible impact on the country’s monetary policy.
The paper examines the likely impact of the CBDC from the perspective of three stakeholders: commercial banks, the Fed, and households. The analysts identified four plausible scenarios for the retail CBDC, potentially changing the country’s monetary policy.
The first scenario involves the public exchanging cash for CBDCs. This scenario of the retail CBDC development has no adverse effect on all the participants in the process because supply and demand do not change, and deposits in commercial banks remain the same. This means that such a situation will have no consequences for the U.S. monetary policy.
The following three options involve the exchange of funds stored on deposit in commercial banks for the retail CBDC. In such a case, Fed analysts emphasize the detrimental effect of CBDCs on realizing monetary policy. Reserve balances in the accounts of commercial banks would rapidly decline in such a development, and they will begin to get rid of certain securities or loans, or offer higher deposit rates to attract customers. Thus, commercial banks would be forced to reallocate their reserves, and the Fed would have to counteract unwanted pressure on short-term interest rates and lower demand for CBDCs by increasing the time deposits are held at the banks. All of this could lead to a cascading failure of the U.S. financial system.
The paper details all the technicalities of the impact of reallocating reserve balances on the Fed and commercial banks, whose actions would depend on the needs of U.S. households interested in the retail CBDC.
According to the study’s authors, “the potential effects on monetary policy implementation from a retail CBDC are highly dependent on the initial conditions of the Federal Reserve’s balance sheet.” Their analysis also demonstrated how the Fed could use existing tools, such as the discount window or permanent repurchase agreements, to manage the impact of the retail CBDC on U.S. monetary policy implementation.
Recall that recent BIS research has shown a high level of interest by central banks in CBDCs, highlighting regulators’ focus on retail scenarios for its use. SWIFT began testing the interoperability of CBDCs of different countries for use in cross-border payments.
