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Very 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 te
by blake1 7y ago
Very 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.