George Selgin on Inflation, Fintechs, and Broadening Access to Fed Master Accounts

Episode Summary

Executive Summary: David Beckworth and George Selgin discuss Fed policy amid hotter inflation readings, the risks of ambiguous average-inflation targeting and forward guidance, and the Fed’s proposal to grant master accounts to certain fintechs. Selgin argues for clearer, rules-based policy and a pragmatic framework letting 100%-reserve fintechs access Fed accounts to improve payments, reduce risk, and expand access without forcing all finance into narrow banking.

Main Topics: Inflation, average inflation targeting, and forward guidance (Priority: 5/5): The hosts debate the recent CPI surprise and whether the Fed’s new framework will lead it to tighten too late. Selgin worries the Fed’s promises not to taper or raise rates for some time could trap it if inflation persists. Ambiguity in the Fed’s new policy framework (Priority: 5/5): Selgin argues the Fed’s average inflation targeting is too vague about lookback windows and the speed of make-up inflation, making it hard to tell whether the Fed is following its own rule. Fed master accounts for fintechs (Priority: 5/5): The main policy discussion centers on the Fed’s request for comment on account access guidelines for fintechs and other nonbank financial firms, especially those with special depository charters. 100% reserve fintech proposal (Priority: 5/5): Selgin proposes that fintechs that keep all dollar liabilities in Fed balances should be eligible for master accounts and need far less capital than risk-taking banks. Payments modernization and legacy systems (Priority: 4/5): The conversation contrasts FedNow with existing payment rails and critiques the Fed for not fixing legacy systems’ weekend/holiday closures and slow settlement delays. Financial inclusion and competition (Priority: 4/5): Beckworth and Selgin discuss how fintech access to Fed accounts could lower costs, expand payment access for the unbanked, and preserve innovation and competition versus a Fed retail-account model. Risks of disintermediation and bank politics (Priority: 4/5): Selgin warns that paying interest on public Fed accounts or certain fintech balances could pull deposits out of banks and create political pressure and disintermediation.

Key Arguments: The Fed’s recent inflation overshoot may not yet prove it has lost control, but its prior forward guidance and taper promises could make it slow to tighten when needed. Average inflation targeting is too vague because the Fed has not specified the lookback window or catch-up speed, making accountability and credibility weaker. A clearer rule—such as specifying a fixed lookback period—would improve transparency and allow the public to judge whether the Fed is honoring its commitments. The Fed’s master-account proposal is significant but limited: it mainly concerns fintechs with bank-like charters, not all nonbanks. Fintechs that hold 100% of customer dollar balances in Fed accounts face little to no run risk and therefore need much less capital than fractional-reserve banks. The Fed can impose conditions on master-account access, including requiring that all dollar deposits remain at the Fed. Allowing fintech master accounts could expand faster, cheaper payment services, especially for unbanked users, while preserving competition and innovation. The Fed should fix legacy payment rails and expand operating hours before overemphasizing FedNow, because many payment delays come from older systems shutting on weekends and holidays. Granting ordinary individuals direct Fed accounts could create major disintermediation and political pressure to pay full interest on those balances. A pluralistic regulatory framework should match capital and oversight to actual risk rather than forcing all payment providers into the same bank-like model.

Data Points: Podcast appearance count for Selgin: 7th time - Beckworth notes Selgin is returning for a record-setting seventh appearance. Date of recording: May 13 - Beckworth says the episode is being recorded on Thursday, May 13. Fed’s earlier rate guidance horizon: 2022 or 2023 - Selgin says the Fed has signaled rates may not rise until 2022 or 2023. Brainard review horizon: 5 years - Beckworth notes Lael Brainard suggested another review in five years. FedNow completion estimate: 2023 - Selgin says the Fed is now saying FedNow will be finished in 2023. Prior FedNow estimate: 2024 - Selgin says earlier guidance suggested FedNow might not be completed until 2024. RTP start year: 2017 - Selgin says the Clearing House real-time payments system launched in 2017. RTP deposit coverage estimate: about 80% of all deposits - Selgin says RTP may already cover roughly 80% of all deposits by the time FedNow launches. ACH same-day timing: three times a day - Selgin says the Fed recently improved ACH to allow three same-day processing windows. Fed’s proposed review window example: 12 or 24 months - Selgin suggests the Fed could specify a concrete lookback window such as 12 or 24 months.

Pivotal Quotes: "The whole setup is shaky, and I think it could unnerve people and make them form expectations or the opinion that the Fed is not really committed to targeting inflation, even if it actually is." — George Selgin: On the risks of vague average inflation targeting and forward guidance "If you are 100% reserve backing fintech, then ... you should get a master account." — George Selgin: On his proposed rule for fintech access to Fed accounts "You can't have it both ways." — George Selgin: On the tension between data-driven policy and unconditional forward guidance

Implications: The episode argues for more transparent Fed rules and a more flexible payment-system framework. If adopted, Selgin’s approach could expand fintech competition, improve inclusion, and reduce risk—without turning the Fed into a retail bank or destabilizing the banking system.