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Fed skepticism builds over the need for a digital dollar

Yahoo Finance’s Brian Cheung breaks down Fed's Waller’s skepticism of a Central Bank digital currency improving U.S. payments and outlook on the Fed tapering its bond purchases.

Video transcript

ALEXIS CHRISTOFOROUS: There's been a lot of talk that the Federal Reserve wants to launch its own virtual currency. But Fed Governor Christopher Waller may be pouring some cold water on that idea. We've got Yahoo Finance's Fed Correspondent Brian Cheung here now to break down his comments. So what did he say exactly, Brian?

BRIAN CHEUNG: Well, Alexis, some very interesting discourse going on over at the nation's central bank over whether or not they should be issuing a digital version of their dollar. We know that there have been efforts in China, and Mexico, and many other jurisdictions to have what they call a central bank-issued digital currency-- essentially, digital versions of their regular printed fiat currencies. But in the United States, it seems like it's far from certain that they'll want to do the same thing with the greenback.

We're hearing from the second big Fed official since they've explore this kind of topic to say they disapprove of the idea of launching such a digital currency. And Christopher Waller, who is the newest board member of the Federal Reserve, saying in a speech earlier this morning that he feels like, honestly, privately issued stablecoins would better serve the need for faster digital payments, which is one use case for a potential digital currency. But take a listen to what he told the American Enterprise Institute with regards to another concern that he has, that being cyber-security. Take a listen.

CHRISTOPHER WALLER: One of the things that definitely concerns me as a Federal Reserve Governor and doing a CBDC is just the cyber risk. I mean, we've been watching for the last couple of years the risk of attacks on systems, and that we want to open ourselves up to this kind of extreme cybersecurity risk. And a CBDC would be a very tempting target.

BRIAN CHEUNG: And what's very interesting about those remarks saying that, well, I'm worried that if we were to have a digital dollar, that would be a huge target for hackers either here or around the world-- those same remarks were very much echoed by the likes of Fed Vice Chairman for Supervision Randy Quarles in a speech in late June. Now, keep in mind, these are not Fed presidents-- these are people that sit within the Board of Governors at the headquarters for the central bank in DC.

And all of this is heating up as the Federal Reserve, again, tries to get the next steps going, take the, I guess, initial steps, if you will, into exploring whether or not it should launch one. There's going to be a paper that the Fed will release sometime in the vicinity of September which will explore not just the possibility of a Fed digital currency, but whether or not there's some regulatory frameworks that the Federal Reserve and other regulators can put around stablecoins and other cryptocurrencies as well-- definitely a space worth watching.

KRISTIN MYERS: And, Brian, of course, all eyes right now are on the Fed-- trying to consider what the Fed's next moves are going to be, especially as we heard recently about the Fed perhaps starting to think about think about tapering. Did he have any comments on the Fed's monetary policy?

BRIAN CHEUNG: Yeah. Of course, any time there's a Fed governor that speaks publicly, you do wonder if they're going to offer any sort of extra insight into where they see monetary policy, especially at this really critical junction where the Fed is starting to think about pulling back its extraordinarily accommodative policy through the pandemic. And Christopher Waller echoing what he had said earlier in the week in saying that he could see the case for tapering its bond purchases-- keep in mind, the Fed's been buying about $120 billion in assets each month-- fairly soon.

He said, quote, "this is a very rapidly progressing economy and labor market." And he said later on that, quote, "it might be able to pull back on our accommodative monetary policy potentially sooner than others may think." So there could be something of an earlier surprise when it comes to maybe pulling back those tapering purchases. Of course, we have to understand that the vote-- or rather the voice of Waller himself is just one of the 18 members of the committee. So as we start to hear more Fed speak, especially ahead of that Jackson Hole meeting in about three weeks, he is just one of those 18 members.

ALEXIS CHRISTOFOROUS: Hey, Brian, before we let you go, I want to ask you quick about tomorrow's monthly jobs report. We know it's a piece of data the Fed looks closely at. For sure, they're going to be looking at wage inflation popping up there. But we also spoke to a market watcher earlier in the show who said that the labor participation rate is also key in tomorrow's report. What do you think the Fed is going to be honing in on?

BRIAN CHEUNG: Yeah, well, I mean, one big reason for that is the Fed's shift in thinking. You have to remember that at the August meeting-- or rather the August Jackson Hole conference last year about this time last year, the Federal Reserve adjusted its framework to say that it's going to prioritize shortfalls for maximum employment. Now, that means more than just the headline U3 unemployment rate, which, again, we'll get an updated print on, at least covering the month of July tomorrow morning at 8:30.

So for the Federal Reserve, it's not just about whether or not the sub-6% unemployment rate will decline further. It's whether or not there are the other dashboard of indicators-- like you mentioned, the labor force participation rate-- that will also be showing signs of recovery, which in that case would show an uptick if that were to be something that were more positive.

Now, of course, when it comes to the estimates on the street, we've been taking a look at the number of Wall Street analysts who have been lobbing out numbers for what they expect to see in July. It seems like the median estimate for right now is something in the neighborhood of 870,000 jobs. Now, that would be pretty good. We have to remember that Christopher Waller, again, that Fed governor we were just talking about, he had said earlier in the week that if there is about 800,000 to a million job gains in both July and August, that would signal to him that they've reached that substantial further progress vague guideline for beginning its tapering of its purchases.

Again, that's just his opinion, but it does show that if the estimates do come in around where the actual figures are tomorrow morning, that could be one more step closer to the Fed pulling back on the punch bowl, I guess, if you will, that it's given to the markets over the last year and a half.

KRISTIN MYERS: All right, thanks so much, Brian Cheung, for bringing us all of those details.