The Role of Central Banks In Global Macro
A deep dive series on the role of CBs, their functions and implications on markets
Hey guys,
Life’s good.
Living in the moment, zoned in, but ever present of the future and what’s ahead.
Thanks for waiting a little longer for this report.
A focused state of mind worth entering.
In this series of reports, I’ll be delving into a topic many traders, investors and market participants know little about, mostly scratching the surface level with. That is the role of central banks in global macro, their tools, functions and wider affect on markets.
As always lend me your attention:
The Role of a Central Bank
On Wednesday in Sintra, Portugal the ECB concluded a two-day forum discussing all things central banking, from monetary policy, to the ideal balance sheet size, and the current policy trajectory of the major central banks globally.
What a time to dive into the importance of these powerful institutions.
Let’s start big picture.
What is a central bank and what is its mandate?
Put simply, a central bank is a financial authority responsible for the policies that affect a country’s supply of money and credit. It doesn’t get much simpler, we’ll delve into the different tools within a central bank’s arson which assist in controlling money supply and credit, but for now, let’s look at the mandate for the Fed, ECB and BOE.
It’s worth noting that each central bank has its own duty and mandate.
When searching for the simplest explanation for the Fed’s dual mandate this extract from 2013 summed it up better than all other recent statements.
The Federal Reserve Bank
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
European Central Bank
“The primary objective of the ECB’s monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2 percent offer the medium term.”
Bank of England
“The Bank of England exists to ensure monetary stability and to contribute to financial stability.”
Short and simple. Now I know this may be very familiar for most of you, but nothing works better than going over the fundamentals. Let’s take a look at a few of the tools used by central banks with the exception of interest rates since this is a topic I have covered extensively.
Central Bank Tools
Reserve ratio: