Yesterday the U.S. Federal Reserve published a paper exploring the impact on monetary policy of potentially issuing a retail central bank digital currency (CBDC). It considers a scenario where the digital dollar were to be widely adopted for both payments and as a store of value. In that case, it could result in the Federal Reserve needing to buy more Treasuries and having a permanently bigger balance sheet.
For context, the Federal Reserve already holds $5.8 trillion in Treasuries or roughly a quarter of the total supply of $23 trillion. In January 2020, the figure was $2.4 trillion out of a $16.7 trillion supply or 14%.
Key assumptions in the research are that the digital dollar would only be available to U.S. households and businesses and would not earn interest. Financial institutions do not hold significant amounts of CBDC for the analysis. Demand for reserves from commercial banks is assumed to be steady, which is acknowledged might not happen in practice.
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