Tuesday, May 26, 2015

Markets, Not Janet Yellen, Should Set Interest Rates

Richard Ebeling emails:

Dear Bob,

I have a new article on the news and commentary website, “EpicTimes,” on, “Markets, Not Janet Yellen, Should Set Interest Rates.”

The media and the news pundits are all focused on the issue of when the Federal Reserve should, could or will raised interest rates from their current low levels. Every word of the Federal Reserve Board members is hanged on for clues, especially those of the Board Chair, Janet Yellen.

What no one seems to ask is, why should the Federal Reserve be in the interest rate setting business in the first place? The Open Market Committee of the Federal Reserve uses its money creation powers to increase bank reserves and influence the Federal Funds rate and other rates of interest to manipulate borrowing and spending.

The fact is, interest rates are market prices that are meant to serve the essential function as all other prices – to inform market participants about changing supply and demand conditions, act as incentives for appropriate responses to changes in supply and demand, and to coordinate and bring into balance the actions and interactions of multitudes of demanders and suppliers.

Interest rates are no different. They reflect and inform about people’s choices to consume vs. save out of income; they serve as incentives for appropriate responses in the face of changes in people’s savings or borrowing preferences; and they coordinate and bring into balance the savings choices of income-earners with the investment opportunities and time horizons of potential borrowers.

Federal Reserve monetary policies distort and imbalance the savings-investment nexus by manipulating interests rates away from where freer markets would bring them into balance. The “boom” and “bust” cycle represents the effects and consequences of banking and financial markets reduced to the monetary central planning tools of central banks.

As long as money and banking remains under the control and power of central banks such as the Federal Reserve, markets will continue to be plagued with the phases of the “business cycle.”


Best Wishes,

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