Speaking on stage at an event hosted by The Clearing House — the large bank-owned payment processor that owns the Real-Time Payments network — Barr said he expects the Fed's recently launched FedNow system to complement its private-sector competitor.

"We actually have a very long history in this country of having both public rails and private rails, that's the way most of our payments technology has evolved over time," Barr said. "And most of our payment systems today have both public aspects and private aspects. We really think of these things as complementary. We work closely together."

Barr's remarks were part of a wide ranging conversation with Joe Weisenthal and Tracy Alloway, hosts of the Bloomberg podcast "Odd Lots." The discussion touched on other payments innovations, digital assets, Treasury market function, regulatory and supervisory developments, and Barr's views on monetary policy. 

The hour-long event kicked off the second day of The Clearing House's annual conference and wrapped up a busy week for the Fed's top regulator, who testified in front of Congress twice and delivered a speech on Treasury market oversight at the Federal Reserve Bank of New York last week.

On the topic of FedNow — the subject most relevant to the payments-oriented event — Barr noted that uptake of the system would take several years and largely be driven by the evolution of use cases and customer demand. He added that he anticipates banks, by and large, will adopt both FedNow and RTP.

He also explained why the Fed trailed so far behind its central banking peers in developing an instant payment system. The U.K. rolled out its version in 2007.

"The Federal Reserve is a conservative institution, and I think that's appropriate," Barr said. "People expect us to be able to provide trustworthy reliable services, and we earn that trust by being very, very careful about everything we do. And that's true for FedNow."

Barr said he hopes banks will implement faster payment technologies in ways that gives customers quicker access to their funds, which he called "a wonderful thing for society."

"We might end up in a situation where we can have a significant effect reducing overdraft fees, insufficient funds, fees, a situation where a small business can get paid right away for the work they've done. It would be a huge benefit for American society," he said. "One of the potential upside benefits of FedNow is the ability to actually deliver, for households and businesses, the kinds of banking services that they want, and that would reduce risk to them."

Barr noted that many banks are already moving away from a reliance on such fees. He said he hopes FedNow continues that trend.

While the Fed is focused on expanding uptake in the near term, Barr said the platform's rollout does not mark the end of its efforts to innovate in the payment space. He noted that some of the central bank's exploration of crypto assets could lead to payments advancements.

"We're looking to add additional features to FedNow over time, and those features will make it easier for banks to use, better for banks to use, better for banks to offer to households and businesses. I think those kinds of innovations are really important," he said. "Then we're also doing very basic research in newer technologies around distributed ledger technology, using encryption techniques to send payments back and forth. That very basic research might help us to continue to innovate."

Similarly, though he is skeptical of some of the grandiose claims about central bank digital currencies, Barr said the Fed's ongoing exploration of the technology is important for determining potential benefits. 

"The research is important because we might uncover ways to be much more efficient with the payments system, and payments system efficiency can help banks and households and businesses conduct their transactions in a lower-cost way," he said. "I'm not super into all the very large claims people make for central digital currency, but I do think that the underlying technology, if it can lower costs, improve efficiency, those things are worth researching."

Regulation and supervision

Barr also discussed his ongoing efforts — in conjunction with the heads of the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency — to rewrite regulations and improve bank supervisory practices.

On the regulatory front, Barr argued that proposed changes to risk-weighted capital requirements for large banks would result in, at most, a minor increase in the cost of credit for individuals, while greatly strengthening the banking system.

"If there's no competition at all, and all of [the additional cost] is passed through to the borrower, the average increase would be 0.03%," he said. "So, it's a very, very small change in the cost of credit, and a significant increase in the resiliency of the banks."

The capital proposal and other changes being considered by federal regulators have fueled a strong — and increasingly public-facing — debate both in Washington and throughout the country. They have also sparked some divergent opinions within the agencies themselves.

Barr has said he wants as much board-level support for the capital proposal as he can muster, but he has also indicated that he will not hold out for unanimity. On Friday, he said welcomes a robust debate within the Fed about the direction of regulatory policy.

"We have one or two board members on a handful of matters that have dissented from the proposals that I put forward, and I think it makes us a better institution to, first, have that conversation and try to reach consensus and, second, if we can't get there, to have dissenting voices," Barr said.

On the topic of supervision, Barr reiterated his commitment to improving the culture within the Fed's oversight and examination arms.

"One of the things that we're making sure of is that supervisors know that they should act with speed and with force and with agility, when risks warrant that kind of action," Barr said. "It does take a change of culture. It does require us to really make sure that examiners are supported and empowered to take that step. We want to make sure that they're trained and have guidance to act forcefully. And I do think that all these measures are really critical to making sure we have a supervisory system that's effective."

Monetary vs. supervisory policy

Barr acknowledged that the failure of three large banks earlier this year and the continued stress on parts of the banking sector were the result of the Fed's own monetary policy actions. He emphasized that banks are responsible for managing interest rate risk on their own, but he noted that Fed supervisors have placed a greater emphasis on that type of oversight this year. 

Barr added that supervisory and stability concerns are topics the Fed — both through the Board of Governors and the Federal Open Market Committee — pays close attention to.

"If we don't have a functioning financial system, we don't have a functioning economy, and so we have to care about financial stability risks in the system," Barr said. "We have regular reports from our financial stability staff, not only internally at the board, but also to the FOMC. We have an opportunity for members of the FOMC to comment on financial stability issues. These things really do go together."

Barr said, in his view, the Fed is near the end of its monetary tightening cycle. He argued that the risks of making interest rates too high is coming into closer alignment with the risk of not lifting them high enough.

"We're likely at or near the peak of where we need to be in terms of having a sufficiently restrictive stance of monetary policy that will sustainably bring inflation down to 2%," he said.