Stablecoins Could Lower the Neutral Interest Rate, Fed Governor Milan Says, Urges Consecutive 50bp Rate Cuts to Bring Policy Rate Back to Neutral

COINOTAG News reports that Federal Reserve Governor Milan argues that ongoing growth in stablecoins could compress the neutral interest rate, implying the policy rate should trend lower to prevent a contractionary stance. He notes that even under a conservative projection, rising stablecoin issuance expands the net supply of lendable funds, exerting downward pressure on the neutral rate.

As the neutral rate potentially migrates lower, Milan contends the central bank must adjust rates downward in tandem; otherwise, it risks a tightening outcome. The Trump-era appointee has urged several consecutive 50-basis-point cuts to move the policy rate closer to the observed neutral level, arguing that external factors and policy shifts are driving the rate higher than warranted.

Under current U.S. legislation, stablecoin issuers must hold reserves on a 1:1 basis with cash and cash equivalents, including U.S. Treasuries. This framework could lift demand for Treasuries as stablecoin issuance scales, impacting liquidity and benchmark yields. Milan also cites immigration policy tweaks and tariff policy changes as forces shaping a lower neutral rate while the Fed’s rate remains elevated.