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Interest rates in the US are not set directly by the government. Instead the federal funds rate is a target rate that the Fed aims for by either expanding or co
by mruts 7y ago
Interest rates in the US are not set directly by the government. Instead the federal funds rate is a target rate that the Fed aims for by either expanding or contracting the money supply.
Also the TIBOR and LIBOR and all the other *IBORs aren’t set by the government either. Certainly government monetary policies affect these rates, but ultimately it’s a free market function.
Having the government directly set private lending rates is a very bad idea and would certainly result in disaster (much like how all other price controls are terrible ideas).
- blake1 7y agoVery short term interest rates in the US are set by the Fed, pretty much at will. Under normal conditions, they have an extremely strong influence on medium term interest rates as well by convincing the market that they will keep short rates high(low) in the future, while will then raise(lower) medium terms rates. If that proves inadequate, like it did after the crisis, the Fed can buy and sell bonds directly to move medium to long-term interest rates. The Fed may have a historical preference for relying on the first mechanism alone, but through some combination of these techniques, they can set any interest rate to any reasonable value almost at will.
- mruts 7y agoSure all of that’s true, but I think there’s a big philosophical and moral difference between changing the incentives of bankers vs forcing them to lend and borrow at a set rate. One relies on an efficient market and incentives while the other relies on coercion and force. It’s possible that the result of both of these systems are equivalent in many situations, but one is much more robust than the other because it still allows for price competition.