Fed intervention to set prices throws markets and interest rates out of
equilibrium. When the Federal Reserve pushes interest rates below what
the market rate would be, everyone wants to borrow money for long-term
projects. Shortages of loanable funds would occur, except that the
Federal Reserve has the ability to create bank balances out of thin… Read More air. The Fed can create a bank ledger on paper, or on a computer,
establish a balance of millions or billions of dollars, and then spend
these dollars out into the economy.

Loans become cheap, and
the result of these lower interest rates is an economic boom which
eventually manifests itself as a bubble. Beginning in 2001, the Federal
Reserve pushed interest rates to as low as one percent, which after
adjusting for inflation meant that the real interest rate was negative,
so businesses were actually making money by taking out loans. This was
the fuel for the housing bubble and the reason there are 19 million
empty houses today.