No bank is obligated to use the Fed system. Unless you want to process a Fed wire or ACH. Or you want FDIC insurance. Or you want to offer banking services to consumers. Or you want access ti the Fed window for short term liquidity.
But if you put those aside and somehow manage to get a bank charter, you could totally eschew the Fed.
Now if you do play in their ballpark you have to play by their rules. And a big one there is the rate that you’ll get on short term deposits. And given the scale it implicitly sets the pace for interbank rates as they have to directly compete with the Fed.
“No one is forcing you to buy bread from the government run nickel bread company, you are free to start your own company and charge whatever you like. If others choose to buy the government’s bread for a nickel, well, hey, that’s just the free market for you.”
I don’t think the (us) government is lending to the banks, it is already on close to trillion dollar deficit, if anything it is borrowing from banks.
“People” in my comment includes groups of people too (eg companies, governments). Shouldn’t one be able to set the price of borrowing, why we must have one party deciding for everyone else.
> I don’t think the (us) government is lending to the banks
Lending to banks is precisely what the Federal Reserve does.
> Shouldn’t one be able to set the price of borrowing, why we must have one party deciding for everyone else.
This is also already the case. If you want to take out a mortgage or a personal loan or a credit card, the interest rate is negotiated entirely between you and the lender (the government has no say in dictating that rate).
The reason Fed interest rates affect your interest rates is that if banks have to pay more interest to borrow from the Fed, they are willing to offer consumers more money for their deposits, and are also going to charge more for money they lend out (since they still need to make a profit on it).
This is part of the reason for recent bank failures: if you're a bank and you offer depositors 1% on their deposits to go and make long-term investments at 2%, you'll make that 1% difference as profit.
If other banks suddenly start offering depositors 3% (due to increased bank-borrowing rates), you're going to either lose depositors to the much better interest rates at other banks or you're going to have to take a loss on those 2%-investments you made, offload them, and make other investments at a higher interest rate.
In all of this, the only hand the Fed had in things is saying "We're charging banks this much interest on the money we lend them"
But if you put those aside and somehow manage to get a bank charter, you could totally eschew the Fed.
Now if you do play in their ballpark you have to play by their rules. And a big one there is the rate that you’ll get on short term deposits. And given the scale it implicitly sets the pace for interbank rates as they have to directly compete with the Fed.