With all of the news swirling around the Federal Reserve this week, and especially today (with remarks being issued by the Fed this afternoon at 2 p.m.), there has been a lot of speculation surrounding central banks.
The Federal Reserve is in the process of unwinding quantitative easing (QE), and many market watchers have speculated that there will be severe ripple effects throughout the marketplace as markets have to deal with this reduced liquidity. Drilling down to the bedrock of the issue – there are going to be fewer dollars chasing bonds and mortgage-backed securities. Rates are generally expected to rise. Turkey’s central bank, at midnight local time, instituted a massive rate hike that, in some instances, doubled applicable interest rates in an effort to stem capital (money) flows out of the country. This money has started to leave Turkey, and other emerging markets, as rates (and expectations of rates) have risen in some more secure economies including the United States.
The central bank of India also issued an unexpected rate hike in the last several weeks, and in light of market actions by other central banks, the South African central bank is widely expected to take similar action.
So what exactly is a central bank? A definition from investopedia is included below, but please also find a definition from A Fresh Pair of Eyes :
A central bank is a governmentally sanctioned financial institution that has control over setting key interest rates in the economy, oversight of the other financial institutions in the country, as well as the nation’s currency. It is always strongly recommended that the central bank be independent from the other branches of government.
The entity responsible for overseeing the monetary system for a nation (or group of nations). Central banks have a wide range of responsibilities, from overseeing monetary policy to implementing specific goals such as currency stability, low inflation and full employment. Central banks also generally issue currency, function as the bank of the government, regulate the credit system, oversee commercial banks, manage exchange reserves and act as a lender of last resort.