Federal Reserve Governor Milan recently expressed important views regarding the impact of the widespread use of stablecoins on the macroeconomy, particularly monetary policy. He pointed out that the popularity of stablecoins may increase the risk of hitting the Zero Lower Bound (ZLB) and have profound effects on the neutral interest rate, the status of the U.S. dollar, and Federal Reserve policy. This discussion not only reveals the potential role of stablecoins in the financial system but also prompts in-depth consideration of their long-term consequences.

First, Milan emphasized that the large-scale adoption of stablecoins could exacerbate the risk of the zero lower bound. The zero lower bound refers to the level at which nominal interest rates approach zero, making it difficult for central banks to stimulate the economy through traditional interest rate cuts because rates cannot be further reduced into negative territory. Stablecoins, as digital assets pegged to fiat currencies (such as the U.S. dollar), typically offer stable value and convenient transaction features. If the public widely holds and uses stablecoins, they could partially replace traditional bank deposits, reducing the demand for the central bank's base money. This would hinder the monetary policy transmission mechanism because, during an economic downturn, the effectiveness of central banks lowering interest rates to encourage borrowing and spending would diminish. For example, if businesses and individuals prefer holding stablecoins over bank deposits, the stimulative effect of interest rate cuts on consumption and investment would be significantly reduced, thereby increasing the likelihood of the economy falling into a liquidity trap—where interest rates hit the zero lower bound and fail to effectively boost demand.

Second, Milan noted that the extensive use of stablecoins could lower the neutral interest rate. The neutral interest rate is the long-term real interest rate consistent with full employment and stable inflation, serving as a key benchmark for monetary policy formulation. The popularity of stablecoins may depress the neutral rate through several channels: on one hand, as a safe and highly liquid asset, stablecoins may attract substantial capital inflows, reducing venture capital and long-term borrowing, thereby inhibiting capital formation and productivity growth; on the other hand, the convenience of stablecoins may encourage saving over consumption, further pushing up the savings rate and leading to a decline in the neutral rate. From a historical perspective, similar phenomena occurred with the rise of money market funds, but the digital nature of stablecoins could amplify this effect. If the neutral rate continues to fall, central banks will face narrower policy space, making it difficult to adjust interest rates flexibly during economic fluctuations.

Furthermore, Milan discussed how the rise of stablecoins might promote broader use of the U.S. dollar and increase its value. Most stablecoins are pegged to the U.S. dollar, and their global circulation could strengthen the dollar's dominant role in international trade and finance. For instance, cross-border payments and dollarization in emerging markets might accelerate due to stablecoins, which would boost demand for the dollar in the short term, leading to its appreciation. However, this trend could also have dual effects: a stronger dollar would suppress U.S. exports and exacerbate trade imbalances; simultaneously, it could complicate the Federal Reserve's interest rate decisions. If the dollar becomes overly strong due to stablecoins, the Fed might be forced to maintain lower interest rates to mitigate negative economic impacts, but this would conflict with domestic inflation targets. In the long run, stablecoins could reshape the global monetary landscape, but potential instabilities must be vigilant, such as triggering capital flow volatility during crises.

In summary, Federal Reserve Governor Milan's analysis highlights the multifaceted nature of widespread stablecoin use: it could constrain the effectiveness of monetary policy by increasing the risk of hitting the zero lower bound and depressing the neutral interest rate, while also potentially strengthening the dollar's status and influencing the interest rate path. This perspective calls on policymakers to enhance regulation, ensuring that the development of stablecoins aligns with financial stability objectives. In the future, as digital currencies evolve, related research needs to further quantify these risks to guide a balance between innovation and risk prevention.