There is no denying that central banks have some impact on interest rates, in both the short and the long run. But the complexity of and qualifications to that impact have been swept into a memory hole, submerging a host of additional questions. How strong or weak is the initial effect on interest rates, and can its strength vary over time or with institutional arrangements? How long does the effect operate after a change in the rate of monetary growth? Does any impact on real rates eventually disappear completely, or can a constant rate of monetary growth make it permanent? Exactly what interest rates are initially affected by monetary policy: only short-term rates or rates across a broad spectrum of maturities extending even into real assets? Addressing these questions exposes serious constraints on the magnitude, duration, and predictability of the Fed's actual control over interest rates. The conventional impression of precise central bank management of even short-term rates turns out to be, at best, highly exaggerated.
The piece is relatively long but, like virtually all of Jeff's articles, makes its case powerfully with economic logic and evidence. And his case is that the Fed has very little control of real interest rates and can affect nominal interest rates a lot, but almost entirely by affecting the expected rate of inflation.
Jeff is one of the top monetary economists in the country and it shows in this article. Part of what makes him so good is his memory: that is, his knowledge of where monetary theory has been in the last 60 and more years.