George Selgin, over at Cato, is writing a primer on monetary policy and his first installment appeared this morning. It's excellent.
Maybe not surprisingly, what I will excerpt here makes the point that Jeff Hummel and I have been making for some time: the Fed does not set or control interest rates. George writes:
If the money-supply effects of central bank actions aren't always predictable, the interest rate effects are still less so. Interest rates, excepting those directly administered by central banks themselves, are market rates, the levels of which depend on both the supply of and the demand for financial assets. The federal funds rate, for example, depends on both the supply of "federal funds" (meaning banks' reserve balances at the Fed) and the demand for overnight loans of the same. The Fed has considerable control over the supply of bank reserves; but while it can also influence banks' willingness to hold reserves, that influence falls well short of anything like "control." It's therefore able to hit its announced federal funds target only imperfectly, if at all. Finally, even though the Fed may, for example, lower the federal funds rate by adding to banks' reserve balances, if the real demand for reserves hasn't changed, it can do so only temporarily. That's so because the new reserves it creates will sponsor a corresponding increase in bank lending, which will in turn lead to an increase in both the quantity of bank deposits and the nominal demand for (borrowed as well as total) bank reserves. As banks' demand for reserves rises, the federal funds rate, which may initially have fallen, will return to its original level. More often than not, when the Fed appears to succeed in steering market interest rates, it's really just going along with underlying forces that are themselves tending to make rates change. (italics his)
I haven't put in the links that are in this paragraph in George's original. For those, go to George's post.