The Economic Outlook, Monetary Policy and Payments

Good morning and thank you for having me. Thank you also to Kathy Budd, Dr. Ed Seifried and the leaders of the NCUMA for the invitation to speak today and for the work that brought us all together.

I’m here from Kansas City, and it's a pleasure to be in another part of the vast United States. It's also a good reminder that the communities we serve can look very different and still have a lot in common.

I'm a former banker, and I've led established banks and worked through mergers and acquisitions. The charters and regulators between banks and credit unions may differ, but I've sat where you sit, and I understand the pride that comes from serving a community. You help families buy their first home or car, help neighbors start businesses, and are a steady presence in good times and hard ones.

Today I'm president of the Federal Reserve Bank of Kansas City, and I bring the perspective of our seven-state region to the Federal Open Market Committee. I want the views of people across the country, including all of you, to be part of that discussion.

This morning I'll discuss the credit union landscape, the economy, and then the importance of how money moves and what instant payments could mean for your members.

The Credit Union Landscape

According to the National Credit Union Administration's most recent quarterly summary, about 4,200 federally insured credit unions serve 146 million members and hold roughly $2.5 trillion in assets. Those are big numbers. But what resonates most with me is not the scale alone. It's what stays constant across it. Credit unions range from small neighborhood institutions to some of the largest in the country, yet whatever your size, you are locally rooted, where the loan officer or board member may also be a member's neighbor.

The national picture looks a lot like the Tenth District. We are home to 295 credit unions, and they operate alongside 657 commercial banks, all but nine of which hold less than $10 billion in assets. Many of these institutions sit in small towns. Nearly 70 percent of the counties in our District are rural, and in many of those places, a credit union or community bank may be the only financial institution within miles.

Credit unions and community banks come to this work through different charters and different structures, but you share a purpose: serving the households, farms, and businesses of your communities. That is why the Federal Reserve pays close attention to institutions like yours. What you see across the counter and around the boardroom table, from loan demand to deposit trends to the confidence of your members, gives us a ground-level view of the economy that no data release can fully capture. We hear from you through groups like our Community Depository Institutions Advisory Council and the Tenth District Payments Advisory Group, and I'm grateful for that counsel. So let me turn now to what I am seeing in the broader economy, and what I am hearing from contacts in my region.

Economic Outlook

By many measures the economy is doing well. Activity is growing at a solid pace, and the unemployment rate is low and close to what many observers consider to be full employment. However, the Fed’s congressionally determined mandate is not just employment, but also price stability. And as Chairman Kevin Warsh said at the Kansas City Fed’s Jackon Hole Economic Symposium in August, the Fed has some work to do on inflation, and, unfortunately, our work has only gotten harder since then.

Inflation has been running too hot. By the Fed’s preferred measure, PCE inflation was 3.6 percent in the most recent data, uncomfortably above the 2 percent price stability target, and moving in the wrong direction. Last week, we got another look at prices with the CPI data for October. Over the previous three months, CPI prices have been increasing at a 5.7 percent annualized rate. Far too high.

I will review four reasons why inflation has been elevated. But first I will start with one factor not currently contributing to inflation: the labor market. Often inflation is linked to a tight labor market. The story goes that strong demand pushes down the unemployment rate and pushes up prices as firms pass along higher costs.

But right now, there is little evidence that the labor market or wages are contributing meaningfully to inflation. Rather, the labor market appears to be largely in balance. Wage growth, at around 3 percent, is within the range of recent norms, and the vacancy ratio, or the number of available jobs per person looking for work, has been about 1, a sign of a balanced job market.

If the labor market is not contributing to inflation, what is? First, energy. If we set aside energy prices, inflation would be running at 3 percent. Still too high, but closer to target. Higher oil prices since the start of the conflict in Iran have fed through into even larger increases in the price of gasoline and diesel. Limited refinery capacity, continued strong demand, and depleted inventories have all contributed to the run-up in petroleum product prices.

Moreover, financial markets suggest a more prolonged increase in oil prices, perhaps on the expectation of a period of inventory rebuild following this year’s disruptions. Developments in product prices were a key theme of an energy conference hosted jointly between the Federal Reserve Banks of Kansas City and Dallas in Houston last week.

Second, durable goods prices are rising. Prices of long-lasting durable goods increased 2.9 percent in September, below the pace of overall inflation, but far above historical norms, in part, because of higher tariffs. Outside of a spike during the pandemic, durable goods prices are increasing at the fastest rate since 1987. The norm in recent decades is that these goods have gotten cheaper over time. From 1995 to 2020, prices for these goods fell consistently year after year. The uncomfortable reality is that with relatively rapid increases in prices for labor-intensive services, we need durable goods prices to decline a couple of percent every year if the Fed is ever going to hit its 2 percent inflation objective.

Third, spillovers from the buildout of AI infrastructure are pushing up the prices for some goods and services. For example, prices for consumer electronics have moved up sharply over the last year. PC prices are up 10 percent. Some of the upward pressure on these prices is coming from the strength of AI demand. We are also hearing about competition for skilled construction labor, steel, and other materials contributing to higher building costs across the economy.

Fourth, health care costs are rising. Over the past year the employer cost of health benefits has increased over 6 percent, the fastest pace in over 20 years, and double the pace of the early 2000s. With a rapidly aging population, health care is in demand and getting more expensive.

Having reviewed some of the key forces keeping inflation up, what does this mean for the Fed and the path of policy? To start, I would like to address two common narratives you hear about inflation these days that I do not think are quite right. First is the argument that high inflation is just a reflection of repeated unfavorable supply shocks, for example oil or tariffs, that the Fed has little influence over and little power to offset. In addition, it is often argued that these are one-time shocks that may lead to a higher level of prices but only a temporary increase in inflation.

I think this view neglects that inflation is always the result of an imbalance between supply and demand. It is in the context of strong demand that a disruption to supply drives up prices. Demand always plays a role in inflation, and the Fed, through its influence on demand, always has the tools and responsibility to address inflation.

Additionally, I would be cautious in assuming that an increase in production costs, either through higher oil prices or tariffs, will only have a temporary effect on the pace of inflation. As I mentioned earlier, prices for durable goods, which are often imported, fell steadily from 1995 to 2020 during a period of sustained increases in trade and global integration. I could conjecture that reversing these trends might lead to a permanent increase not just in the level of prices, but also in the pace of inflation for these goods.

The second narrative you hear acknowledges that the strength of demand is boosting inflation, but then argues that the sources of that demand are resistant to Fed policy. The AI buildout is often central to this narrative, with the argument that AI investment will continue apace even if confronted with higher interest rates. While I am not sure that this is true, at least at the margin, I would also push back on the idea that meeting our inflation objective requires a reaction from any particular set of prices, for example prices for AI-related technology goods.

Relative prices have to change, that is how market economies work. The Fed’s role is not to affect the price of any one good or service, but rather to maintain the aggregate purchasing power of the dollar relative to all goods and services in the economy.

Both narratives—that inflation is being driven by either supply shocks or by demand that is impervious to higher interest rates—have a common core. Mainly, that inflation is somehow beyond the Fed’s power to control. I don’t believe this to be true. The Fed does have the tools to address inflation and has the responsibility to achieve price stability. As Chairman Warsh said, we have work to do.

The Federal Reserve’s Role in Payment Modernization

As we look at where the economy is headed, it's worth considering what keeps it moving. Efficient and safe payments are the circulatory system of the economy. When money flows reliably, other products and services can deliver their full value. When it doesn't, even the most thoughtful lending program or polished mobile app will be constrained.

The Federal Reserve has been an active participant in the payment system since our inception. We have a public-interest mission to promote the integrity and efficiency of payments and to ensure every depository institution has access to these services on an equitable basis, whatever its size or charter. The Fed has often acted as a convener to find solutions to common challenges, and External LinkFedNow, the newest payment rail from the Federal Reserve, is the latest chapter in that story.

You've probably heard your own members ask: "Why does it take so long for my money to show up?" That question is really what instant payments—and FedNow—are about.

FedNow offers eligible institutions of different sizes the ability to offer instant payments 24/7, 365 days a year. Through FedNow, financial institutions and their service providers can provide innovative instant payment services to customers. Recipients have full access to funds immediately, allowing for greater flexibility.

Why do instant payments matter now? Because the market has changed. Federal Reserve research shows that 78 percent of consumers prefer faster payments when given the option. And 66 percent of businesses say they are likely to use instant payments if their financial institution offers them.

The benefits are practical. Faster access to funds improves liquidity for households and businesses. Instant settlement reduces float and settlement risk. For a small business, it provides price certainty from the start of a transaction. And it creates a foundation on which others can build new products and services.

FedNow: Designed for Safety

Trust is another essential part of this story, and it is easy to take for granted. Our payments system has a long record of reliability. Trust has to be earned and maintained, and that principle is central to how we have approached FedNow.

The first question I’d expect from your boards is simple: Is it safe? Safety was built into FedNow from the beginning.

FedNow is built on a credit push-only architecture. Funds can be sent but never pulled. Only the sender can start a payment, so no one else can reach into a member’s account and take money out.

Many have experienced why that matters. You've seen altered checks, stolen mail, and forged endorsements. In each case, someone other than the account holder captured information needed to pull money out of an account. With FedNow, that risk is eliminated.

Institutions also have real control over how they participate. On the sending side, you set your own limits, your own controls, and your own hours, based on what fits your members and your operational capacity. What you commit to is being ready to receive, around the clock, so that when someone sends your member money, it arrives.

The tools will keep improving. A network intelligence tool uses historical FedNow data to flag patterns and insights in real time, adding another layer of information before a transaction is finalized, and risk management features continue to evolve in partnership with the industry.

For credit unions, this should resonate. Your culture is built on protecting members, and the question of how to offer speed without sacrificing safety is one your boards and supervisory committees already know how to ask.

FedNow: Adoption and Use Cases

Safety is necessary, but it's adoption that drives utility. So, let me now share where adoption stands. Since FedNow launched in July 2023, nearly 2,000 financial institutions have signed up. Over 95 percent are smaller institutions with under $10 billion in assets, but seven of the ten largest institutions in the country are on the network too, and more than 50 service providers are now certified to support payment processing.

Among credit unions, almost 600 were signed up as of the end of July. That is roughly one in seven credit unions nationwide, so there is room to grow, but the momentum is real. Credit union participation is up more than 40 percent year-over-year, and sending functionality is growing even faster: The number of active senders has grown 85 percent over the past year. That matters because a payment network becomes more valuable with every institution that joins, and especially with every institution that can both send and receive.

The use cases show what this means for people. Earned wage access and same-day pay have moved into mainstream employment. Instant loan disbursement gets funds to a borrower or merchant at the point of need, even at night or on a weekend. Many credit unions are already using FedNow this way, especially for auto loans. Instant settlement gives small businesses greater price clarity. And last year, the first federal emergency relief disbursement was sent instantly through FedNow via Treasury's digital pay program.

If you're wondering where to start, I'd suggest three questions to take back home.

Who owns this decision? It's a governance question, not just a technology one, and your board and supervisory committee should be part of it.

What can your service provider or correspondent do? Ask them about sending and receiving capabilities.

What are your members already asking for? The use cases may already be sitting in your loan portfolio or deposit base.

You don't have to answer these alone.

Start with your Federal Reserve Financial Services relationship manager, and draw on our advisory groups, education, and research tailored to institutions like yours.

There is also a timely reason to start that conversation. Federal Reserve Financial Services recently announced a FedNow discount program beginning January 1, offering statement credits to customers who meet certain criteria. Your relationship manager can walk you through the details and help you understand whether your institution qualifies.

Before I close, let me share a short story that has stayed with me.

One of our staff members wanted to find a financial institution that could send instant person-to-person payments, not just receive them. They opened an account at a local community financial institution with full send capability. When they needed to pay a colleague, the colleague's regional bank account wasn’t able to receive instant payments, so the colleague used an account at a local credit union that offered instant payments. As advertised, the payment arrived instantly.

Neither individual called the regional bank to ask it to adopt FedNow. They simply used what worked. People rarely announce that their expectations have changed. Activity just quietly shifts.

That payment worked because one institution chose to send and another was ready to receive. It takes both, and every institution that does both makes the network more useful for everyone.

Conclusion

That brings me back to what brought us all here: meeting the needs of your members. A sound economy depends on payments people can trust and that work efficiently, whether it's a household accessing a paycheck or a small business making payroll. Instant payments are one more tool for that mission. Whether and how to engage is each institution's decision, but I encourage you to consider what they might mean for your members and communities.

Thank you for having me this morning and thank you for the important work you do every day. I look forward to your questions.

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