A Federal Open Market Committee (FOMC) member’s speech is a pivotal event closely followed by financial markets and analysts. His comments provide crucial insights into the Federal Reserve’s future policy decisions, particularly regarding interest rates, inflation, and the broader economic outlook. These statements not only indicate the Fed’s position on current economic conditions, but also provide valuable guidance on how the central bank will address future challenges. Investors, policymakers, and economists alike pay close attention to these speeches, as they can influence market expectations and impact financial strategies around the world. As such, understanding the nuances of this speech is essential to anticipating the direction of US monetary policy and its potential impact on both domestic and international markets.
Here is Waller’s full speech as delivered today, Wednesday, August 28, 2024:
The Fed has sought to achieve the G20 goal of more cost-effective and timelier cross-border payments through various initiatives. These efforts date back to the late 1990s when the Fed adapted the Automated Clearing House (ACH) service to support international payments. Most recently, in 2015, we worked with the industry to further improve the payments system. Today, while consumers and businesses can generally send payments globally, they still demand faster and cheaper options, just as we want faster travel and cheaper fares. However, the effectiveness of interconnected systems in meeting these demands remains uncertain.
With fast payment systems now in place in more than 70 countries, attention is turning to how these systems can enhance global payments. One promising approach is to interconnect these systems, allowing banks in different countries to send payments through links between their domestic systems. This concept is part of the G20 Roadmap, which aims to address cross-border payments challenges globally with input from key stakeholders, including the private sector.
Balancing Payment Speed and Risk Management: What the FOMC Member Said
Some friction in the payments process is intentional, as the system incorporates it for compliance and risk management. For example, slower payment speeds help prevent money laundering, detect fraud, and recover incorrect or fraudulent payments. While the current system, which relies on a complex chain of correspondent banks, slows down transactions, speeding up these payments may increase the risks faced by banks involved in the interconnected systems. Therefore, legal, compliance and operational aspects must be considered when discussing the possibilities and challenges of interconnecting these systems.
On the other hand, it must be considered whether all parties involved in cross-border transactions want to receive faster payments. Sellers usually prefer fast payments, while buyers tend to delay payment for as long as possible. Therefore, stimulating faster payments requires careful consideration. Although personal transfers are an exception as they usually require fast transfers, they constitute a small portion of the total value of cross-border payments. Therefore, we must strike a delicate balance between the benefits of public sector intervention to enhance the speed of payments and the costs of this intervention.
The role of the private sector in reducing costs
As for the role of the private sector in reducing costs, if there is a decision to stimulate faster payments through reducing costs, who will bear this responsibility? Should the private sector do so through competition as is the case with other products? Or is there a specificity that requires the intervention of the central bank to connect networks and reduce costs? We have seen examples of private sector innovation in cross-border payments, both at the wholesale and retail levels. For example, the Real-Time Payment System enables users to clear and settle global transactions in seconds and ensures compliance within less than 24 hours.
Enhancing the effectiveness of global payment: As Waller said
Payment systems, like all networks, depend on widespread access to grow and increase value. At the global level, this requires building strong local networks as the foundation for interconnected networks. Without these local networks, interconnected systems may fail to achieve their desired effectiveness.
Countries have approached building these networks in different ways. For example, in Brazil, the central bank made it mandatory to participate in the successful Pix system, while the government of India collaborated with the central bank and the private sector to build advanced digital infrastructure. In the United States, where there are more than 9,000 financial institutions, the Federal Reserve built a fast, universally accessible payment system to support its policies.
At the time, there was only one instant payment system, developed by the largest private banks, but it was not sufficient to cover all institutions, which prompted the Federal Reserve to step in to solve coordination issues in line with its historical role in the US payments system.
Technically, interconnecting fast payment systems requires compatibility between local networks and facilitating global payments. However, achieving interoperability faces significant complexities, including legal, compliance, transaction settlement, and governance challenges. Even when technological connections are available, payments may not be instantaneous due to differences in the implementation of the global ISO 20022 standard, used by most fast-track payment systems. Operators must coordinate on common practices to seamlessly send ISO messages across borders. Finally, the public sector must play a vital role in improving cross-border payments, and the Federal Reserve is actively engaged in this effort.
We will continue to work in international forums to enhance the speed and efficiency of cross-border payments and address the challenges associated with connecting payment systems. In the near-to-medium term, we will focus on building and increasing participation in the FedNow network domestically.
