Strictly speaking, the Fed does set the interest rates, but, from an economic perspective, it does not know what the true interest rate is. It’s impossible to know, yet many assume that the Fed does know this rate. Attempting to set the interest rate is a form of price control, as spawning from this attempt provides a chain of economic events…these events are costly. For example, keeping interest rates too low, allegedly is supposed spawn economic growth, but the trade off cost for this price fixing measure is more inflation. Inflation devalues the monetary base—requiring the consumers to use more monetary units to buy the same goods.
Excerpt from the article:
“Last week, the Federal Reserve did what was expected by leaving their targetfor the fed funds rate unchanged. To the point that a misplaced adverb can cause a mini market selloff, investors meticulously dissect Federal Open Market Committee minutes and hang on Fed Chair Jerome Powell’s every word for language that provides insight into where the Fed may take interest rates. It’s a near universal axiom that the Fed sets interest rates, and we’re all just along for the ride.
How much control does it really have, though?”