How Central Banks Set Interest Rates

Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates · Oct 30, 2026 · 11m · transcript

Lucas and Luna dissect the mechanical reality of how central banks actually set interest rates in a modern banking system. Moving past the textbook IS-LM model, they explore the operational shift from scarce-reserve to abundant-reserve regimes, focusing on the floor rate mechanism and the role of overnight reverse repos. Using the Federal Reserve's recent policy framework as an anchor, the hosts explain why controlling the money supply through open market operations is no longer the primary tool for hitting inflation targets. Instead, they examine how paying interest on reserves creates…