Karen Petrou: Three Critical FedNow Questions: FedWhy? FedWhen? FedBetter?

2023-07-24T09:28:43-04:00July 24th, 2023|The Vault|

FedNow went live – or at least got out of bed – on Thursday.  This is about ten years after the Board first acknowledged that faster payments would be better payments.  Maybe late is better than never given the importance of instant payments, but FedNow’s anti-climactic launch raises three fundamental questions:  FedWhy?  FedWhen? And, FedBetter?

Let me turn first to FedWhy. The U.S. central bank thinks one of its fundamental civic obligations is controlling the payment system, a conclusion reached more as a result of envy – every other big central bank gets to play with its payment system – than by the private sector’s failure to ensure safe, sound, and speedy payments.  Congress knew this in 1980 and the Fed’s payment authority is thus conditional, not that you would know this by looking at the Fed’s various payment offerings and most especially FedNow.

Congress hesitantly allowed the Fed to offer payment services largely because the Fed asked for payment powers.  Statutory approval was grudging, demanding that the Fed provide payment services only after meeting certain conditions, including calculating a “private-sector adjustment factor” or PSAF to ensure that the central bank didn’t crowd out private payment systems.

However, every calculation of every PSAF ever since 1980 has been a masterful sleight-of-hand that allows the central bank to dominate payments.  Nothing about FedNow – whose costs have largely been a closely-guarded secret – suggests its PSAF is anything other than another rationale for the Fed to control payments.

That might …