The Federal Reserve System has more influence over the rate of economic growth—certainly nationally and arguably globally—than any other institution. When it sets the federal funds rate, the Fed affects the decisions of producers and consumers far and wide. When it lowers the rate, producers borrow more, from Midwest farmers to Silicon Valley techs. Likewise, consumers borrow more for everything from cars and houses to laptops and smartphones. People roll their sleeves up, the economy is stimulated, and GDP grows.
At least, that’s what the Fed hopes. At times, though, the Fed finds itself “pushing on a string,” dropping the federal funds rate with little effect on economic activity. But the Fed has numerous tools and tactics for stimulating economic activity, and it has a long track record of doing so.
That was a good thing for much of the 20th century, but it was bad for the environment. By the latter decades of the century, the global economy was clearly in ecological overshoot. This realization, stemming from fuller integration of the natural sciences, gradually spawned the poorly funded but conceptually powerful field of ecological economics. Today, the calls to look “beyond GDP” are going mainstream, and they’re not just about the GDP metric. They’re a diplomatic way of saying that economic growth—increasing production and consumption of goods and services in the aggregate—is no longer a suitable goal for the world, all things considered.
Meanwhile, growth remains ingrained in Fed culture, given the Fed’s deep ties to Wall Street. Its governors are typically economists or lawyers, many of whom move in and out of the private banking sector, Fortune 500 corporations, government, politics, and academia. Among its professional staff, the Fed employees over 400 Ph.D. economists, practicing a profession notorious for the “invention of infinite growth.”
Beyond its culture, the Fed is mandated, pursuant to the Federal Reserve Act amendments of 1977, to proactively promulgate economic growth. In particular, it must “maintain long run growth of the monetary and credit aggregates…so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
Strictly speaking, then, growth per se is not the goal, but rather a means to achieve “maximum employment.” The logic is straightforward. All else equal, a growing GDP entails an increasing number of jobs. That’s especially important when a population is growing at a significant rate.
If the real economy is growing, with more jobs and all, “growth of the monetary and credit aggregates” (a growing money supply, especially) is needed for “stable prices.” Incidentally and conversely, growing the money supply is conducive to a growing real economy, at least in the short term.
But with those 1977 amendments, Congress was trying to have its cake and eat it too. By then, the Phillips curve, demonstrating the inverse relationship between unemployment and inflation, had been circulating for almost 20 years. Lowering the federal funds rate was growthmanship 101, but it was (and is) inflationary. Readjusting the rate upward helps stabilize prices, but it’s recessionary.
The “dual mandate” of the Fed turned out to be mission impossible, and the source of tremendous political and financial strain. But there’s a simple cure: the steady state economy. This will surely take an act of Congress, prefaced as follows.