FedNow is five years away, but that’s not to say there are no options today. There is actually a private sector alternative offered by the Clearing House and it has been growing since 2017. Further, this private alternative was spawned from the Fed’s own call for help! It was only after a billion dollars of private sector investment and a list of banks had signed up that the Fed announced it, too, would enter the ring.
At this point, it is actually the Fed that has positioned itself to introduce inefficiencies to the existing market. This becomes abundantly clear when we look at the proposal for the program. Among other things, the Fed argues that it will need more than ten years just to recover its operating costs.
What private business is given this much time to pay off its operating costs?
Not only is this unlikely in the private sector, it is also a clear price signal that this is an inefficient allocation of resources. In arguing for this extended period, the board even admits that a traditional 10-year cost recovery period could result in “volatile prices or prohibitively high service fees” that would “negatively affect service usage.” In other words, they expect the costs to be so high that no one would use it. Imagine using that argument with your local bank. I dare say you’d be leaving without a loan.
