We live in the most unusual economic period in history. Never before have we or any people in the world lived with a ‘real interest rate’ of zero for 7 years.
Real interest is an economic concept introduced by Abba Lerner at the same time he gave meaning to Keynesianism in 1943. His real interest rate deals with the type of capital investments made by a society. When real interest is low, bridges and highways are built, when real interest is high, quick return is abundant, like retail coffee shops and liquor stores.
With 'real interest' near zero it would be time to make long term investments, but there are very few. Corporations prefer bonds because long term investments have disappeared due to environmental studies and environmental legal battles that take eight years to settle before a project starts. (Example: a desalination plant in San Diego.)
I think the Fed no longer exists. Sure it has dozens of expensive buildings and thousands of employees supported by a tax on private banks, but it has little or no monetary effect.
Interest rates on domestic loans are based on a combination of long term U.S. bond rates plus a percent for risk. Prime one year corporate loan rates are a combination of U.S. bond rates plus 2%, for home loans it is bonds plus 3%, auto loans plus 5%, credit card loans plus 14%.
The Fed currently makes ultra short term loans to member banks (weekly market) at the ‘window’ which only determines bank profitability.
The open market behavior that is supposed to determine interest rates and the exchange rate of the dollar, no longer works. The Fed has a trivial effect on the $40 trillion U.S. bond market. The bond market is a self determined market of its own. Like the $25 trillion stock market.
The U.S. bond market determines the value of the dollar relative to other currencies, mostly based on the relative rates of return for financial instruments and the 'balance of payments'. (Not the 'balance of trade' which is different.)
Inflation is determined by the same forces as those effecting the value of the dollar. A strong dollar based on balance of payments creates a low inflation, zero inflation or deflation. The Fed is just as irrelevant in the inflation issue as it is on the value of the dollar.
The Fed has been stuck in its real role: irrelevant, for seven years; just as the Bank of Japan has been stuck there for 25 years.