Over at TheMoneyIllusion I did a post discussing the issue of whether central banks should be thought of as "controlling" interest rates. Here's one excerpt:
There are powerful cognitive illusions here. The day-to-day Fed "control" over rates creates the illusion of much more control than actually exists. Monetary policy is much more than a series of short run decisions on where to set the fed funds target. By analogy, a bus driver going through the Alps has very good short term "control" over the direction of the bus. He can nudge the bus left or right by turning the steering wheel. But over longer stretches of time the direction of the bus is "controlled" by a combination of the direction of the road (i.e. economy) combined with the bus driver's strong desire than he and his passengers don't hurl over the edge to a terrifying death (i.e. hyperinflation/hyperdeflation).
Let's take that analogy a bit further. You are about to take a bus from Zurich to Milan, right over the Alps. You have three buses to choose from:
1. Bus A is a self-driving machine, fitted with a rear-mounted camera and the latest automatic steering mechanism, designed by noted Swiss engineer Johan Taylor. When the camera sees that the bus has deviated too far to the right of the road, it automatically steers the bus to the left, and vice versa.
2. Bus B is driven by Johanna Yellen, widely regarded as one of Switzerland's best bus drivers.
3. Bus C is a complicated human/machine hybrid. It has forward looking cameras, that feed road images into a large building, in real time. About 10,000 bus drivers sit at the controls of a simulator, and steer the bus as they think is appropriate. The average of all of their steering decisions is fed back to the bus in real time, in order to adjust the steering mechanism. To motivate good steering decisions, the 10,000 bus drivers are rewarded according to whether their individual steering decisions would have led, ex post, to a smoother and safer drive than that produced by the consensus.