By Scott Sumner
At least not in the sense that NYC controls the rent on apartments. This post was triggered by a recent Karl Smith post:
The interest rate on T-Bills is simply whatever the Fed wants it to be. T-Bills and bank excess bank reserves are essentially interchangeable. In normal times the value of excess reserves is the Fed Funds rate. Today it is the Interest on Reserves rate. However, both of those are essentially controlled by the Federal Reserve.
This is the conventional wisdom, but I thinks it’s (approximately) wrong. Because this is very confusing, let’s start off by discussing why controlling interest rates is not like controlling rents. Under rent control, the government legally mandates a particular maximum rent, and a shortage often results. The Fed doesn’t put any legal price controls on fed funds or T-bills. There is no shortage. Rather it adjusts the money supply as needed to keep short term rates at the desired level.