How exactly does this work? I thought that the fed controlled interest rates. Under what circumstances could the interest rate rise independently of the fed?
At the end of the day, money is stored work. If your country is running a deficit, living beyond its means, then you're dependent on other people's work now, on the promise of returning the favour later. If it starts to look like you're not going honour that, then suddenly you have to face the shock of living within your means, and no amount of printing new money is going to relieve you of that. If you can't live within your means, i.e. reduce the deficit to zero, you're going to have to start promising at lot more work in return, for the shortfall you have now.
No, no it's not. USD denominated interest rates are whatever the Fed wants them to be. The Fed controls the entire USD yield curve, although that control does weaken a little as maturity goes out into the future, but not more than about 10%.
Treasury auctions are kabuki theater[1]. Thanks to the Primary Dealer system it's impossible for an auction to fail. While the nominal rate may bounce around a few basis points, at the end of the day the Fed absolutely controls rates. They will literally create reserves and lend them to primary dealers at whatever rate is necessary to assure Treasury sells as many securities as it needs to at something near the target rate.
Typically when weaker countries do this, it was once considered a sign of fundamental weakness and a sure sign that a currency crisis was imminent. The US abandoned the same principles in government finance that it once advanced through institutions like the IMF. It's not that it was bad advice; we see the results of the irresponsibility in today's markets. The US is just a big bad 'basket case' without much in the way of financial credibility past what it can dictate through market manipulation.
Makes you wonder if there could be a scenario where the Fed raises rates for interbank lending and for loans to the general public but maintains a near zero percent interest rate on its own debts. As far I can tell the Fed operates with impunity and can do whatever it wants. So why not stave off inflation while protecting itself at the same time.
Not if they do YCC. Yield curve control. Which they are sort of doing at the tail end of the yield curve. And they did that back in the 40s as well when US had tons of debt from all the spending in the war.
Not an expert, but the central bank can set the interbank loan rate (rate at which banks loan money to each other overnight).
But for things like mortgages, personal loans, corporate bonds, those are not control by the fed and rates are set through auctions.
Of course, the fed controls the money supply so can signal whether they will increase or decrease it, so the rates set at auctions are influenced by what people think the feds will do.
If the demand for labor exceeds the supply of labor inflation goes up which also means interest rates must go up. The Fed exists to moderate inflation down to a 2% inflation goal. When you consider that inflation had been below target for a number of years with no way to increase it, it only makes sense to let it run wild for a bit and then reign it in.
