– Fed Digital Currency Further Off: Fed Studying Monetary, Other Implications
By Steven K. Beckner
(MaceNews) – Cleveland Federal Reserve Bank President Loretta Mester said Tuesday that the Fed will launch a new instant payments system or “FedNow” in a matter of months, but said the Fed has not yet decided whether it makes sense for the Fed to issue its own digital currency.
Mester, who chairs the Fed’s Financial Services Policy Committee, said the Fed is still studying the monetary policy and other implications of a U.S. central bank digital currency, although she said the Fed is “experimenting” with the technology of creating such a regime.
She is also a voting member of the Fed’s policymaking Federal Open Market Committee, but made no comments on the economy or monetary policy after addressing a Chicago Federal Reserve Bank Payments Symposium.
More and more people are seeking new ways to execute transactions online or via mobile devices and want to execute them faster. For example, a 2021 Fed survey found that nearly seven out of 10 consumers use mobile payment devices to send or receive payments, and 83% of consumers are using a digital wallet or a fintech payment app at least occasionally to complete transactions, Mester noted.
In response, Mester said the Fed is making extensive efforts to modernize the payments system with the aim “foster(ing) a system that is not only efficient, secure, and effective, but also one that is innovative, adaptable, resilient, and accessible to everyone: a payment system that consumers and businesses can rely on with confidence to efficiently make purchases, pay bills, and get paid.”
She said the Fed and its collaborators have recognized for 10 years that “the U.S. payment system needed to evolve further and faster to support the changing nature of commerce, keep pace with the global economy, meet the changing needs of end users and offer them better value, and address new and ongoing threats to security.”
Since the Fed published a strategy paper 2015, Mester said two things have happened. “First, the payments landscape has undergone significant change …. New technologies have shaped the public’s expectations for faster, more efficient, and broadly accessible payment services that, at the same time, are safe and secure.”
Second, there has been “considerable progress toward the goal of a better payment system that benefits all ….. Innovative digital payments products are filling gaps, addressing inefficiencies, and expanding payments access to underserved consumers.”
Mester said the pandemic accelerated the shift to electronic payments, noting that e-commerce sales now account for about 14% of total U.S. retail sales – up from about 6% in 2013. With this growth, risks of cyber fraud have also increased, and the Fed is partially motivated by the need to contain that.
She said, “the Fed is also working constantly to strengthen the defenses and enhance the resilience of our clearing and settlement platforms.”
Many financial transactions are still done by traditional checks, but Mester said the Fed is “focused on enhancing (electronic) payment efficiency.” It is working with the Business Payments Coalition on an e-invoice exchange market pilot — “an effort to build and test a virtual network that will enable businesses of all kinds to exchange e-invoices by establishing a secure and open delivery framework between providers.”
The Fed is striving to build a “faster payments infrastructure,” said Mester, adding that “real-time settlement is an important security feature of faster payments.”
To that end, she said the Fed “will launch its own instant payments rail incorporating real-time clearing and settlement, the FedNow℠ Service, between May and July of next year.”
The Fed’s goals in offering instant payments through FedNow include “providing greater flexibility to consumers and businesses through instant access to their funds; increasing access to the payment system for more consumers; offering the potential for greater efficiency in B2B payments by including invoice and remittance data within payment messages; and leveling the playing field for competition,” she said.
“This faster-payments rail and the innovation that will emerge around it hold great promise in making both domestic and cross-border payments more efficient and more accessible to all,” she added.
After spending several years planning for and investing in FedNow, Mester said “its launch is fast approaching. Financial institutions will be able to connect to the service either directly, via their core processors, or through a technology service provider.”
Mester urged financial institutions and core service providers to “prepare themselves to use the new service.” She said the Fed is “leaning in on stakeholder engagement to ensure everyone is ready” and has a pilot testing program involving more than 120 participants.
Participating in FedNow will require increased investment by the financial industry, she acknowledged. “But the Fed is asking you to make those investments so that you’ll be prepared to offer this new instant payments service to your customers, who are increasingly demanding faster payments.”
The launch of a Fed central bank digital currency is further off.
At this point, the Fed, under the Board of Governors’ direction, is “exploring emerging technologies and evaluating whether there is a potential role for a U.S. central bank digital currency (CBDC) in the future ….”
Earlier this year the Board of Governors released a discussion paper outlining potential benefits, risks, and policy considerations of a U.S. CBDC and invited public comment.
Echoing that paper, Mester said “there are numerous issues pertaining to CBDC that have to be evaluated including the implications for financial stability, global financial market functioning, and the transition of monetary policy; how to ensure security and balance privacy with transparency; and whether there is a use case for CBDC in the U.S.”
She said, “no decision has been made about whether to issue a U.S. central bank digital currency.”
“Nonetheless, given the evolving digitalization of the financial system, … the Federal Reserve System is researching and experimenting with the underlying technologies,” she continued. “We are gaining insights that will not only help inform a future decision on a CBDC but also aid our current work on faster payments, interoperability between payment systems, and payment system resiliency.”
Mester joined in a unanimous FOMC decision on Sept. 22 to raise the federal funds rate by 75 basis point for the third straight meeting to a target range of 3 to 3.25%. At the same time, FOMC participants upwardly revised their funds rate projections dramatically to a median 4.4% at the end of 2022 and to 4.6% at the end of 2023.
Other Fed officials have also expressed a strong commitment to reducing inflation, while often minimizing the economic cost of doing so.
On Monday, New York Fed President John Williams said that, by tightening monetary policy to realign the balance between supply and demand, the Fed should be able to reduce inflation markedly with only relatively moderate impact on growth and employment.
“We are already seeing some of the effects,” he said. “Broad measures of financial conditions, including borrowing and mortgage rates and equity prices, have become significantly less supportive of spending …..”
“As this continues, I expect real GDP to be close to flat this year and to grow modestly in 2023,” he continued. “As a result of slowing growth, I anticipate the unemployment rate will rise from its current level of 3.7 percent to around 4-1/2 percent by the end of 2023.”
Williams, who cited the 4.6% funds rate projection, went on to say he “expect(s) the combination of cooling global demand and steady improvements in supply to result in falling rates of inflation for goods that rely heavily on commodities, as well as for those that have been most affected by supply-chain bottlenecks. These factors should contribute to inflation declining to about 3% next year….” and then “moving close to our 2 percent goal in the next few years.”