Must the Fed Fight Growth - Action: Economic Commentary on Monetary Policy and Interest Rates

Sep 21, 2026

Uploaded by Eliana

An economic commentary by Jerry L. Jordan argues that conventional wisdom misreads current monetary policy. It frames rising federal funds and interest rates as outcomes of inflation expectations and shifting demand for credit rather than simple proof that policy must deliberately restrict growth. The text emphasizes the Fed’s ambiguous price-stability mandate, explains how money’s purchasing power relates to inflation through the analogy of apple prices, and discusses unusual macroeconomic conditions during the 1991 recovery and the subsequent turn in expectations.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages5

Reading Time13 min

AccessFree to download

Must the Fed Fight Growth?

Why Do Interest Rates Rise?

by Jerry L.Jordan Irallof you infomation about theconomy came from the nightly newsand the daily press,your thinking wouldprobably go something like this: “A funny thing happened on the way tothis economic boom.The economy gavea party and the Federal Reserve didn'tcome.Just as U.S.business activity waspoised to burst from under the lingeringshadows of the 1990-91 recession,mone-tary policy took a decidedly restrictivetum this year.Apparently,central bankershave been willing to sacrifice economicexpansion in order to tilt at inflationwindmills existing only in their own hy-peractive imaginations." For evidence that thisinterpretation ofpolicy is widespread,one need look nofurther than a recent headline reportingthe Federal Open Market Committee's(FOMC)latest move:"Federal ReserveRaises Key Rates to Curb Growth."Sosaid the New York Times.So says Con-ventional Wisdom. But is Conventional Wisdom in factwise?I think not.This Economic Com-mentary examines what I believe arethree fundamental misconceptionsabout current monetary policy: ● Interest rates paid by householdsand businesses would have remainedlow if monetary policy had remainedstimulative. ■ Rising federal funds rates—or,more specifically,ovemight interbankloan rates—will shorten or retard thecurrent expansion. # Must the Fed Fight Growth? ● The monetary authorities control in-flation by regulating the real growth ofthe economy. These beliefs have arisen as false corol-laries to two general observations aboutmodem industrial economies,namely,1)the level of interest rates affects privatespending,and 2)periods in which spend-ing on current output accelerates are fol-lowed by periods of higher inflation. These familiar assertions are a standardpart of macroeconomic analysis.As such,I would not enjoy the task of undermin-ing their acceptance and make no attemptto do so here.What I do want to accom-plish is to confront the current mythologysurrounding monetary policy actions bycombining these propositions with twoothers:1)inflation results from too muchmoney chasing too few goods,and 2)theFederal Reserve is charged with achiev-ing multiple—and often conflicting—economic objectives,as opposed to beingheld accountable for price stability alone. I want to emphasize this last point.Not only does the U.S.central banklack a clear statutory responsibility forprice stability,but the very meaning ofthat term is subject to a great deal ofambiguity.The absence of a fully cred-ible commitment to the stable purchas-ing power of the dollar has led to over-interpretation of every twitch,sneeze,and cough by monetary policymakers. July 15,1994 In a recent speech,Federal ReserveBank of Cleveland President Jerry L.Jordan responded to critics who as-sert that the Federal Reserve inten-tionally slows the real growth of theeconomy in order to keep wage andprice pressuresin check.In Jordan'sview,the critics have it backwards:Monetary policy actions aimed at sta-bilizing the purchasing power ofmoney are the best way to enhancereal growth in the long run. # ■ Why Do Interest Rates Rise? By way of analogy,let me star with adifferent question.Why does the priceof apples rise?The answer,of course,is simple.The price of apples risesalong with the cost of everything elsewhen the purchasing power of moneyfalls—the phenomenon referred to asinflation—or when there is a funda-mental change in demand or supply.Ifdemand increases or supply fallsprices rise. This simple example is directly rele-vant because an interest rate,after all,is really just a price.In particular,it isthe price paid to savers and by borrow-ers.Like apple prices,then,interestrates pick up either because the rate ofinflation increases(more precisely,be-cause the expected rate of inflation in-creases),or because there is an excessdemand for the funds that are providedby national saving. For instance,an orchard blight wouldboost the price of apples while reduc-ing the quantity demanded.In this case,we would be in

FAQs

What does the commentary challenge about conventional wisdom on monetary policy?

It argues that current monetary policy actions are widely interpreted incorrectly, especially the idea that higher interest rates necessarily result from a deliberate effort to slow real growth.

Why do interest rates rise according to the text?

Interest rates rise when inflation expectations increase or when there is excess demand for available loanable funds, reflecting changes in savings incentives and borrowing demand.

How does the apple-price analogy explain inflation and interest rates?

It compares inflation to changes in the purchasing power of money: apple prices rise when purchasing power falls or when demand and supply conditions shift, and interest rates are treated similarly as a “price” paid for saving and borrowing.

Sep 21, 2026

Uploaded by Eliana