The Federal Reserve Is Foot-Dragging on the Digital Dollar, Yardeni Complains

Ed Yardeni is peeved at the Federal Reserve, charging that the central bank is delaying a vital roll-out of what’s called a digital dollar. A cyber-buck is often touted as accessible to all income groups, and free of onerous fees and postponements that beset legacy credit cards and other established payment systems. In all likelihood, the Fed would run this new denomination.

“The US Federal Reserve is studying the idea of a digital dollar to death,” the economist groused in a posting on the Yardeni Research website. Yardeni, the firm’s president, kvetched that the Fed is spending time collecting comments and data on the idea, intending to publish a “discussion paper” in early September. “In other words, a digital dollar is many years away from landing in your digital wallet,” he wrote.

Yardeni held up Fed Governor Lael Brainard as an example of someone who appreciates the need to move faster on digital dollars, a concept known as central bank digital currency, or CBDC.

“The dollar is very dominant in international payments, and if you have the other major jurisdictions in the world with a digital currency, a CBDC offering, and the US doesn’t have one, I just, I can’t wrap my head around that,” Brainard told the Aspen Institute Economic Strategy Group, as quoted in a July 30 Reuters article. “That just doesn’t sound like a sustainable future to me.”

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Indeed, some 60 nations now are either researching or enacting digital currencies, according to the CBDC Tracker, part of Boston Consulting Group.

Critics such as Yardeni and Brainard (rumored as a possible replacement for Fed Chair Jerome Powell) lament that the lack of a digital dollar is increasingly at odds with the nation’s evolving consumer finance system. Only 28% of US transactions were done with cash in 2020, down from 50% a decade before, a McKinsey study found. And since the pandemic hit, experts say it’s likely the cash economy has shrunk even more. Right now, cashless exchanges are the province of private companies, such as Visa, which detractors say are fee-heavy and delay-prone. While apps on the order of Zelle and Venmo easily transfer money digitally, they still must be routed through the traditional banking system.

The CBDC’s appeal: Consumers could spend a Fed-sponsored digital dollar like cash, and, if all went well, do so without the fees and delays that privately run digital payment operations encounter. This new setup, in theory, would be a boon to the “unbanked,” that group of Americans who lack savings and checking accounts—5.4% of households as of 2019, per a Federal Deposit Insurance Corporation (FDIC) study.

A US failure to adopt a Fed-backed digital dollar would cede the field to cryptocurrencies called stablecoins, Brainard warned. Designed to avoid the volatility of other crypto, such as Bitcoin, a number of these currencies are pegged to a US dollar.

Trouble is, stablecoins aren’t actually supported by central banks or governments. That “eliminates a level of safety enjoyed by the dollar,” Yardeni said. “Regulators will lose control over regulating transactions.” He pointed out that US, UK, and Japanese regulators “all have called for greater regulation of stablecoins and other areas of decentralized finance.” Tether, the largest stablecoin issuer, disclosed that as of March, almost half its reserves were in commercial paper, an asset class that got decimated in the 2008 financial crisis.

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Tags: cash, CBDC, Cryptocurrency, digital dollar, dollar, Ed Yardeni, Federal Reserve, Lael Brainard, stablecoin, Tether, unbanked

New York State Comptroller Thomas DiNapoli has lowered the long-term assumed rate of return on the $268.3 billion New York State Common Retirement Fund to 5.9% from 6.8%. He also said employer contribution rates to the New York State and Local Retirement System (NYSLRS) will be reduced.

The New York State Common Retirement Fund is the third largest public pension fund in the United States, and it holds and invests the assets of the NYSLRS on behalf of more than 1 million state and local government employees and retirees and their beneficiaries. The NYSLRS itself is broken into two systems: the Employees’ Retirement System (ERS) and the Police and Fire Retirement System (PFRS).

The estimated average employer contribution rate for the ERS will be lowered to 11.6% of payroll from 16.2%, while the estimated average employer contribution rate for PFRS will be cut to 27% of payroll from 28.3%. According to the actuary’s estimates for the fund, the expected total employer contributions for Feb. 1, 2023, are $4.4 billion, which is $1.5 billion less than the expected employer contributions during the same period for 2022 and the lowest level since 2011.

Employer rates for NYSLRS are determined based on investment performance and actuarial assumptions recommended by the retirement system’s actuary and approved by DiNapoli.

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“The fund’s strength gives us the ability to weather volatile markets. Our prudent strategy for long-term, steady returns helps ensure our state’s pension fund will continue to be one of the nation’s strongest and best funded,” DiNapoli said in a statement. “While the reduction in employer contribution rates is welcome news for taxpayers, our investment decisions are always made based on what is best for our 1.1 million working and retired members and their beneficiaries.”

It is the fourth time DiNapoli has lowered the state pension fund’s assumed rate of return, having reduced it to 7.5% from 8% in 2010, then to 7% in 2015, and then to 6.8% in 2019. The new reduction puts the fund well below the median assumed rate of return among state public pension funds of 7%, according to the National Association of State Retirement Administrators (NASRA). Only 34 of the 133 state public pension plans listed had assumed rates of return of less than 7%.

DiNapoli also announced that the funded ratio of the state pension fund is 99.3% and that it has annualized rates of return over the past five, 10, 20, and 30 years of 11.17%, 9.19,%, 7.65%, and 8.96% respectively.

That the assumed rate return is more than 3 percentage points below the fund’s 10-year annualized return is indicative of the retirement system actuary’s forecast of a lower-return environment over the next decade. In this year’s annual report to the comptroller on actuarial assumptions, Actuary Michael Dutcher provided a forecast of a 6.07% return net of fees over the next 10 years. He also said 2021’s record rate of return “provides a door of opportunity to align the assumed return with the sole trustee’s risk appetite.”

Dutcher also recommended increasing the inflation assumption to 2.7%, which would result in an increase in the cost of living adjustments (COLAs) to 1.4% from the current 1.3%. The COLA is half of the percentage increase in inflation raised to the next tenth, which means a COLA of 1.4% will be applied in September, which is 0.1% more than the current assumption. COLAs apply to the first $18,000 of a retiree’s single-life pension. Spousal beneficiaries are entitled to one-half of the retiree’s COLA.

“This is not primarily a response to the FY 2021 experience,” Dutcher said, “but there is a growing rumbling among economists that is less sanguine about inflation expectations than in the previous two decades.”