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The rate the central bank sets is effectively a floor below which banks will not lend. The effective Federal Funds Rate in the U.S. is around 1.16% The one year

The rate the central bank sets is effectively a floor below which banks will not lend. The effective Federal Funds Rate in the U.S. is around 1.16% The one year Treasury rate is around 1.24%. People and banks are lending money to the government for one year for essentially .08%, and this is not entirely risk free. Rates went negative after the financial crisis, and German bond rates are below Treasuries. If banks could find funding at 0.1% they would make money lending at 0.2% (depending on and adjusting for risk). So central bank rates are probably keeping interest rates higher than they would be. All of this is controversial and no one knows for certain how central banks, interest rates, and inflation interact, it's a complex dynamic system and popular descriptions are simplifications that are probably wrong.

jamez1 9y ago
Their open market operations affect short term bond yields which in turn affect long term bond yields. They clearly intervene and it's hard to imagine interest rates being as low as they have been without the intervention. When they buy bonds, it pushes the yields lower, if things were where they were naturally the fed/ecb etc wouldn't have the sheer number of bonds they do on their balance sheet.
sbenitoj 9y ago
The prices of all goods and services in the economy are determined by the intersection of supply and demand. Central banks exert enormous influence over the money supply, and therefore the price of borrowing money is influenced by central banks. In the absence of central banks it's likely the world would eventually settle on a single commodity to be used as money, and it's unlikely to be a commodity that's inflated into oblivion like fiat currencies. Additionally it's unlikely that people will somehow start loaning out money for a rate of almost 0%, why would people loan money (and therefore risk losing it) for a return of 0%? They'd be better off just holding onto it.

jamez1 9y ago

Their open market operations affect short term bond yields which in turn affect long term bond yields. They clearly intervene and it's hard to imagine interest rates being as low as they have been without the intervention. When they buy bonds, it pushes the yields lower, if things were where they were naturally the fed/ecb etc wouldn't have the sheer number of bonds they do on their balance sheet.

sbenitoj 9y ago

The prices of all goods and services in the economy are determined by the intersection of supply and demand. Central banks exert enormous influence over the money supply, and therefore the price of borrowing money is influenced by central banks. In the absence of central banks it's likely the world would eventually settle on a single commodity to be used as money, and it's unlikely to be a commodity that's inflated into oblivion like fiat currencies. Additionally it's unlikely that people will somehow start loaning out money for a rate of almost 0%, why would people loan money (and therefore risk losing it) for a return of 0%? They'd be better off just holding onto it.