David Andolfatto on a Standing Repo Facility, the Future of CBDC, and Plumbing Issues in Monetary Policy

Episode Summary

Executive Summary: The conversation surveys three current Fed issues—standing repo facilities, average inflation targeting, and central bank digital currency—then broadens to fiscal dominance, U.S. government debt, and the role of global demand for Treasuries. Andolfatto generally welcomes the Fed's moves as pragmatic improvements, but stresses careful communication, institutional design, and the interaction between monetary policy, fiscal policy, and payment innovation.

Main Topics: Standing Repo Facility (Priority: 5/5): The guests discuss the Fed's growing support for a permanent repo backstop after the 2019 repo turmoil and March 2020 market stress. Andolfatto argues the facility would improve interest-rate control and reduce unneeded spikes in money market rates. Average Inflation Targeting and Make-Up Policy (Priority: 5/5): They debate the Fed's new framework, with Beckworth defending it as a step toward level targeting and Andolfatto endorsing the direction but criticizing the messaging of 'promoting higher inflation' rather than restoring nominal incomes. Central Bank Digital Currency (CBDC) (Priority: 5/5): Andolfatto explores possible CBDC designs, including account-based and token-based forms, arguing for a narrow public-option model but acknowledging privacy, AML/KYC, and disintermediation concerns. Stablecoins and Payment Innovation (Priority: 4/5): The discussion turns to private stablecoins as a potential way to fill payment-system gaps, spur regulatory reform, and test new technologies, though their social value may depend on whether they reflect genuine innovation or regulatory arbitrage. Fiscal Dominance and Government Budget Constraints (Priority: 5/5): The speakers explain how monetary policy affects Treasury financing costs and why fiscal policy ultimately backs government liabilities through future taxes, spending choices, and inflation outcomes. Treasury Demand, Network Effects, and Inflation (Priority: 5/5): Andolfatto argues that global demand for safe U.S. liabilities—used as collateral, reserves, and in stablecoins—may have offset inflationary pressure from higher debt, but warns that complacency could still lead to future inflation.

Key Arguments: A standing repo facility would act as a preannounced backstop, improving expectations and reducing the need for discretionary emergency interventions. Low take-up of a standing facility would not mean failure; if designed properly, it should mainly shape private market behavior rather than be heavily used. Average inflation targeting is directionally sensible, but it is easier to communicate as nominal-income restoration than as a policy to raise the cost of living. The Fed should present makeup policy as a response to recessionary shortfalls, not as an explicit goal of generating inflation. CBDC could work as a basic public-option payment instrument with low fees and broad access, but design choices matter greatly for privacy and bank disintermediation. Token-based CBDC is appealing for anonymity and cash-like properties, but such features raise anti-money-laundering and terrorism-financing concerns. Private stablecoins may force incumbents and regulators to improve payment infrastructure, even if their direct social value is uncertain. Government liabilities are implicitly backed not by gold but by future fiscal capacity—taxes, spending restraint, and the government's ability to manage inflation. The U.S. has probably benefited from rising global demand for Treasuries, which has supported low rates and low inflation despite larger deficits. Excess demand for safe U.S. liabilities may have slightly dragged on real growth by absorbing savings that otherwise could have funded consumption or investment.

Data Points: Fed inflation target undershoot: about 50 basis points - Andolfatto says U.S. inflation has averaged roughly 0.5 percentage points below the official target since 2012. Fed inflation target adoption: 2012 - Referenced as the official start of inflation targeting in the United States. Repo facility start date: September 2019 - The New York Fed's daily repo operations with primary dealers began then. Temporary FEMA repo facility: March 2020 - The Fed created a temporary repo backstop during market stress. Fed dollar note usage: $100 bill as major export - Andolfatto uses the global circulation of $100 bills as an example of permissionless access to Fed liabilities. Postal savings share at peak: about 10% of the deposit base - Used to illustrate how a public payments/savings option once attracted substantial usage. Global user base mentioned for Facebook money: over 2 billion people - Andolfatto notes Facebook's network as a possible foundation for a large stablecoin or money-like product. Potential historical inflation benchmark: 1970s - Used as the rare era when high nominal income growth and inflation were a real issue. Public debt concern period: past two decades / post-crisis - Referenced as the time when hyperinflation predictions did not materialize despite rising debt and money supply.

Pivotal Quotes: "A substantial majority of participants saw the potential benefits of an appropriately calibrated facility as outweighing the potential costs." — David Beckworth quoting April FOMC minutes: Introduces the discussion of a permanent standing repo facility. "It seems kind of strange for me to kind of think about why we would not want to think about embedding that property in a central bank digital currency." — David Andolfatto: Arguing for at least some token-like or bearer-like CBDC functionality. "It's a tough sell." — David Andolfatto: On the communication challenge of telling the public the Fed wants inflation to rise temporarily.

Implications: The episode suggests the Fed is moving toward more credible backstops, more flexible makeup policy, and deeper payments modernization. But success will depend on clear messaging, careful design, and recognizing that Treasury demand, fiscal policy, and digital money innovation all shape macro outcomes.