Interest Rates and the Fed: What is the Relation?

Source: Cobden Centre
by Dr. Frank Shostak

“It is widely held that the central bank is a key factor in the determination of interest rates. By popular thinking, the Fed influences the short-term interest rates by influencing monetary liquidity in the markets. Through the injection of liquidity, the Fed pushes short-term interest rates lower. Conversely, by withdrawing liquidity the Fed exerts an upward pressure on the short-term interest rates. Popular thinking also suggests that long-term rates are the average of current and expected short-term interest rates. … Hence, it would appear that the central bank is the key in the interest rate determination process. However, is this the case?” (07/09/21)