The Fed tells us that they attempt to establish a level of interest rates that is neutral with respect to the general price level. This is one in which the price of credit does encourage market forces to push prices up or down. It is presumed that this rate will balance the needs of savers and borrowers. This whole process is really a charade. What they are describing is the rate of interest derived from a free market. If they want a free market rate, why not stand aside and let the market set rates?
The answer to that is rather clear. It would expose their irrelevance in the working of a vibrant economy. Free markets do not need to be managed. The actions of 10os of millions of market actors ensure a vibrant economy. If savings exceeds investment, interest rates will fall. If there are not enough savings, interest rates will rise until the supply and demand for savings fall back into balance.
It is often important to remind ourselves that if free markets work for commodities, cars, computers, and haircuts, it will work for money as well. There is no greater way to distort an economy than to suppress interest rates. This results in a boom, that eventually leads to a bust.
