Interest rates are set by FED, who can print arbitrary amount of money out of thin air, there is no supply/demand mechanism involved in setting them. Basically every rate change is an experiment testing whatever monetary theory is currently popular among FED board members.
>Interest rates are set by FED, who can print arbitrary amount of money out of thin air
One interest rate is set by the Fed, which serves as a benchmark for other market rates.
But it's a simple question: if I can borrow money at 3%, why would I borrow your money at 7% so you can earn a return? And if someone wants to lend me money at 3%, why is that "artificial"?
>who can print arbitrary amount of money out of thin air
How else should money be created? Should we do pretend mining, like Bitcoin?
> One interest rate is set by the Fed, which serves as a benchmark for other market rates.
This used to be true, but lately CBs are also buying bonds. That affects their supply/demand balance, which affects their price, which is another way of expressing the interest rate.
Monetary policy, and the setting of rates, is accomplished by the buying and selling of bonds in the open market by the Fed. They buy bonds and create money, or sell them to destroy it. This affects the amount of money "available" in the system, which affects interest rates.
Of course, this transmission mechanism isn't perfect.
Real mining seemed to work okay in past. American GDP grew faster in the 1800s under the gold standard (avg. 4%+) than any time after the creation of the federal reserve.
> American GDP grew faster in the 1800s under the gold standard (avg. 4%+) than any time after the creation of the federal reserve.
Yes... during industrialization. Basically all countries experience rapid GDP growth during their industrialization. Even developing countries today get 4%+ GDP growth. Look at China's GDP growth in the last 50 years for a recent example.
You would still have to prove to me that the rate of gold mining is the perfect tool to prevent inflation/grow the economy. Who knows if it may have grown faster or slower during that period without the gold standard.
