August 4, 2010 Reading Time: < 1 minute

“On June 30, 2004, the Federal Reserve Open Market Committee announced it was raising the targeted federal funds interest rate from 1 to 1.25 percent, to begin to prevent a possible future price inflation. The next day the European Central Bank (ECB) decided to leave its targeted interest rate unchanged at 2 percent, even though price inflation within the euro currency area is averaging above the target range set by the ECB.

Practically all the commentaries that either preceded or followed the Fed’s and ECB’s announcements focused on what impact these decisions will have on investment and consumer spending, and whether or not the decisions will fuel higher price inflation in the future.

What was not commented on is the more fundamental question of whether either the Fed or the ECB should be attempting to set or influence interest rates in the market. Clearly, the presumption is that it is both legitimate and desirable for central banks to manipulate a market price, in this case the price of borrowing and lending. The only disagreements among the analysts and commentators are over whether the central banks should nudge interest rates up or down and by how much.” Read more.

“Interest Rates and the Federal Reserve”
Richard Ebeling
The Freeman, September 4, 2004, Vol. 54, Issue 7.
Via the Foundation for Economic Education.

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Tom Duncan

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