In case there was any doubt…
> (email exchange)
> On Mon, Mar 30, 2015 at 11:28 AM, Scott wrote:
New from Bernanke:
Why are interest rates so low?
what matters most for the economy is the real, or inflation-adjusted, interest rate (the market, or nominal, interest rate minus the inflation rate). The real interest rate is most relevant for capital investment decisions, for example.
The equilibrium interest rate is the real interest rate consistent with full employment of labor and capital resources, perhaps after some period of adjustment.
Large deficits will tend to increase the equilibrium real rate (again, all else equal), because government borrowing diverts savings away from private investment.
Contrary to what sometimes seems to be alleged, the Fed cannot somehow withdraw and leave interest rates to be determined by “the markets.”
[the Fed] has no choice but to set the short-term interest rate somewhere.