Do Lower Interest Rates from the Fed Boost Economic Growth?

On September 18, 2024, the Federal Reserve (Fed) made a significant move by lowering its policy interest rate target from 5.5% to 5%. This decision has been interpreted by many, including Fed Chairman Jerome Powell, as a positive action aimed at bolstering the economy. The underlying belief is that reducing interest rates will stimulate demand for goods and services, leading to increased production and economic growth. This perspective suggests a causal relationship where heightened demand ultimately drives supply. However, an alternative viewpoint posits that supply often precedes demand in a market economy. Producers generate goods not only for personal consumption but also for trade, indicating that expanded production can stimulate demand for other goods. This vernacular challenges the conventional belief that demand is always the precursor to supply, suggesting instead that a focus on production is crucial for economic vitality.

At the core of economic growth lies the importance of savings, considered essential for expanding the productive structure of the economy. Savings facilitate investment in capital goods and infrastructure, vital for sustaining employment in various production stages, including consumer goods. Without adequate savings, the expansion of production is challenging, as workers require consumption support during the production process. It’s not just about having tools, machinery, or labor; a sufficient level of savings enables activities that foster economic growth. This relationship between savings and production emphasizes that consumer demand is, in essence, constrained by individuals’ capacity to produce goods and services.

The role of government in economic production is another critical consideration. Often, government services are regarded as low-priority compared to those produced by wealth-generating entities. The government lacks the capacity to create wealth independently and often inhibits genuine production through taxation. Taxes on productive individuals redistribute wealth in a manner that promotes the consumption of less valuable government services at the expense of more valuable goods produced by the private sector. Such dynamics weaken the overall wealth generation process. By imposing taxes and reallocating resources, the government diminishes the potential for economic growth, contradicting the notion that increased government spending necessarily benefits the economy.

The connection between monetary policy and wealth generation cannot be overlooked. A central tenet of economic theory is that an increase in the money supply, especially through expansionary monetary policy enacted by the Fed, often leads to situations where nothing is exchanged for something valuable. This weakens the foundation of wealth generation as monetary inflation disrupts savings and capital investment. When the government spends more funding into the economy without deriving from productive activity, it dilutes genuine demand, impacting overall economic prosperity negatively. Observations from economic theorists like Rothbard highlight that government spending does not lead to true demand creation, thereby emphasizing that expansive fiscal and monetary policies often detract from wealth production and capital accumulation.

Despite the adverse effects of monetary inflation, an examination of past trends indicates periods of increasing monetary growth – for instance, a marked rise and fall in the growth rate of the money supply from February 2021 through June 2023. A decline in the inflationary growth rate of the money supply can contribute positively to savings and long-term economic growth. A sustained decrease in the money supply may enhance the overall savings rate, lowering the propensity for individual consumption today in favor of investing for future production. This interplay suggests that a healthy monetary supply supports individual savings, in turn, fostering economic growth. However, recent Fed actions, including the rapid increase in money supply growth rates, may impede this process and misallocate resources, ultimately stunting genuine economic expansion.

In conclusion, evaluating the implications of the Fed’s interest rate adjustments highlights a complex but significant relationship between monetary policies, savings, production, and economic growth. While the intention to stimulate demand through lower interest rates exists, the often-overlooked principle that increased production may lead to increased consumption reveals why supply can precede demand. Furthermore, the nexus between savings, productive investment, and the government’s role in wealth redistribution complicates the narrative surrounding fiscal and monetary policies. The danger lies in viewing such interventions as unequivocally beneficial to economic growth when, in reality, they can skew the allocation of resources and wealth generation in ways that undermine overall prosperity. Ultimately, a balanced approach that respects the natural dynamics of the market while encouraging genuine production and savings may be more conducive to sustainable economic growth.