Whether inflation is actually an efficient tax – whether the economic harm it causes is worth the fiscal benefit – is far from clear. Certainly an extra bout of inflation that’s fully anticipated, and that therefore raises nominal interest rates and bond yields in advance, does very little to improve the government’s financial position, and even less now than in the past. That’s because the public sector has almost nothing in the way of zero-interest liabilities. If higher inflation and nominal growth pushed up the demand for physical cash the government might make a little more from that source. (The economic value of cash is higher than the cost of producing it. The difference, known as “seigniorage”, is a source of revenue for the public sector3). But the sums involved are 2 On their own, the instruments of policy are not a reliable way to discern whether there’s “monetary finance” of the government. But they may be more informative alongside other information. For example, if the central bank is easing policy in the face of clear inflationary pressure that might suggest it’s putting weight on some other objective: the joint behaviour of instrument and target can be informative. It might also tell you something if the central bank eased policy and, at the same time, the authorities introduced restrictions to limit or prevent people from selling the government’s debt. That way, the central bank might be able to reduce borrowing costs for the government alone – i.e.
Reflecting the Federal Reserve’s historical interest in the mitigation of settlement risk, and in anticipation of the emergence of real time retail payments in the United States, we are currently exploring an expansion in operating hours of the National Settlement Service to support the final and irrevocable settlement of interbank positions in central bank money. We are pursuing this interest in three phases. In 2015, we expanded the NSS operating window modestly, opening an hour earlier at 7:30am and closing a half hour later at 5:30p.m. Subsequently, we announced our readiness to open NSS as early as 9:00 p.m. on the prior calendar date, consistent with the operating window of the Fedwire Funds Service, if requested. Finally, we are currently evaluating prospects for weekend settlement hours, perhaps encompassing a 24x7 operating window for NSS, for which we are validating demand prior to finalizing our direction. It is critical to consider these matters in advance of the advent of real time retail payments to anticipate the needs of customers and to respond to the interests of policy makers. The Federal Reserve’s Strategies for Improving the Payment System also aspire to achieve greater end-to-end efficiency in cross-border payments, an historical pain point for end users. In support of this interest, and following an exhaustive season of consultation with industry leaders, we are currently in the midst of a multi-year effort to adopt the ISO 20022 payment message formats for the Fedwire Funds Service.