Interest Rates Are Set by People, Not Central Banks

Interventionists see interest rates as a key policy parameter set by central bank bureaucrats, betraying a crucial misunderstanding about the nature of interest. In reality, rates are determined by individual time preference– the willingness to trade off future and present consumption.

The following article was originally published by the Mises Institute. The opinions expressed do not necessarily reflect those of Peter Schiff or SchiffGold.

It is commonly held that the long-term interest rate is an average of current and expected short-term interest rates. The short-term interest rate, it is maintained, is determined by the central bank policy rate, such as the federal funds rate in the US. Hence, it follows that the central bank is the key in the interest rate determination process. But does it make sense that individuals have nothing to do with interest rate determination?

According to Carl Menger,