This alludes to one of the key problems with central-bank managed credit: you don't get accurate price signals about how much real capital is currently available for investment.
The return on capital obviously does depend on the supply -- more supply should mean lower interest rates, exactly as you're describing, which is exactly what you want in order to keep the level of capital investment at a useful level, neither too high nor too low.
But when your dominant interest rates are chosen by committee and defended by central bank open market actions, all that price signalling doesn't happen. Investors of all kinds get false signals about the availability of capital throughout the economy, and you get clusters of malinvestment.
The return on capital obviously does depend on the supply -- more supply should mean lower interest rates, exactly as you're describing, which is exactly what you want in order to keep the level of capital investment at a useful level, neither too high nor too low.
But when your dominant interest rates are chosen by committee and defended by central bank open market actions, all that price signalling doesn't happen. Investors of all kinds get false signals about the availability of capital throughout the economy, and you get clusters of malinvestment.