Which entity is primarily responsible for setting short-term interest rates?

The entity that primarily sets short-term interest rates is the Federal Reserve. This central banking institution plays a critical role in the U.S. economy by controlling monetary policy, which includes adjusting short-term interest rates to influence economic activity. By raising or lowering these rates, the Federal Reserve aims to achieve goals such as stable inflation, full employment, and sustainable economic growth.

When the Federal Reserve changes the federal funds rate, it indirectly influences the rates at which banks lend to each other overnight. This action can cascade through the economy, affecting everything from consumer loans to mortgages, and thus impacting spending and investment decisions.

The federal government does not directly set interest rates; rather, it may influence economic conditions through fiscal policy. Commercial banks have their own internal policies and rate structures but react to the rates set by the Federal Reserve. Investment firms operate within the landscape created by interest rates but do not have the authority to set them. Therefore, the Federal Reserve's actions are central to determining the short-term interest rates that affect the overall economy.