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What is a central bank?


A central bank is a financial institution that manages the monetary policy and currency supply of a country or group of countries. It is typically responsible for maintaining stability in the financial system. This includes the stability of prices and promoting economic growth. Although some are nationalised, a central bank usually operates independently of a country’s government but is intrinsically non-market-based. It is also not competitive. The central bank’s primary focus is to make decisions that are in the economy’s best interest.

Central banks and forex

Central banks play a significant role in the foreign exchange market. This is due to their ability to influence the supply and demand of a currency, and therefore its exchange rate. Central banks typically use monetary policy tools like setting interest rates and adjusting money supply to influence the exchange rate of their currency. How?

Core functions of central banks

Central banks undertake several vital activities to maintain the financial and economic stability of countries like:

Some of the world’s most prominent central banks. Central banks across the globe seek to ensure the reliability and stability of a nation’s financial systems. These are some of the most notable central banks worldwide:

Federal Reserve

The Federal Reserve System (the Fed) is the central bank of the United States. Created in December 1913, it is today one of the most powerful central banks worldwide. The US Federal Reserve has several essential functions. It is responsible for promoting monetary policy, regulating the banking system, and maintaining stability in the financial system. It also oversees consumer protection and seeks to ensure the safety of payment and settlement systems. The Fed is controlled by Congress.

How is the Fed structured?

The Fed is comprised of three distinct groups. The first is a board consisting of 7 governors or board members nominated by the U.S. President and confirmed by the U.S. Senate. While acting independently of the U.S. government, the board is required to report to Congress. Their role is to maintain the objectives of the Fed.

The second group is the Federal Reserve Banks which are 12 regional banks that manage different regions of the United States. The Fed’s board is responsible for its supervision. These banks are found in New York, Boston, Cleveland, Atlanta, Philadelphia, Richmond, Chicago, Minneapolis, Kansas City, St. Louis, San Francisco, and Dallas.

The 3rd group is the FOMC (The Federal Open Market Committee). The FOMC is comprised of the Fed’s board members plus the 12 presidents of the reserve banks. The Head of the Federal Reserve Board acts as the FOMC chair.  The FOMC meets eight times a year, during which time it assesses economic conditions, the stability of the financial system, and monetary policy.

Several other influential central banks exist such as the Bank of Canada, the Reserve Bank of Australia, the Reserve Bank of New Zealand, etc. Each of these central banks plays an integral role in the stability of their country’s economic and financial systems.

In summary

While the specific functions or structure of each central bank may vary, the want for economic stability and currency control remains standard worldwide. Central banks play crucial roles in maintaining this stability to achieve healthy economic growth and to ensure prices remain stable. They do this using a variety of different monetary policy tools to ensure objectives are as far as possible achieved.

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