Central bank

Central banks occupy a central position in national or shared-currency monetary systems, but their powers and objectives are set by different laws and institutions. Many conduct monetary policy with the aim of keeping prices stable. The European Central Bank, for example, describes price stability as its primary task for the euro area; the United States Federal Reserve is directed to promote both maximum employment and stable prices. These different mandates illustrate why the responsibilities of one central bank should not automatically be attributed to all others.

Monetary policy changes financial conditions in an effort to influence inflation and economic activity. A widely used tool is a policy interest rate: when a central bank raises or lowers the rates that affect short-term funding, the change can pass through to borrowing, saving, spending and investment decisions. Central banks can also use market operations, including purchases or sales of securities; bond purchases may be used to put downward pressure on longer-term interest rates. These tools influence the economy rather than setting every price or guaranteeing a particular outcome, and their effects can take time to spread.

Many central banks have responsibilities beyond setting monetary policy, although the division of work differs among jurisdictions. The Federal Reserve, for example, describes roles in financial stability, bank supervision and regulation, payment systems, and consumer protection. The European Central Bank coordinates with national central banks in the euro area on several tasks and contributes to banking supervision and payment infrastructure. Some central banks also act as a lender of last resort, providing emergency liquidity to banks facing short-term funding stress. In the euro area, emergency liquidity assistance is subject to rules, is not guaranteed, and is intended for solvent banks; it is not an unconditional rescue.

Central banks are organized in different ways. The Federal Reserve System combines a Board of Governors with 12 regional Reserve Banks, while the European Central Bank works with the national central banks of countries using the euro. Their legal frameworks specify who makes policy decisions, what objectives guide those decisions, and how responsibilities are shared. Some central banks are granted operational independence to pursue a legally defined mandate; this does not remove public accountability. The ECB describes its framework as protecting its independence while also providing for accountability, and the Federal Reserve Board reports directly to Congress. Because decisions can affect borrowing costs, employment, savings and financial stability, explaining policy and answering for decisions are important aspects of central-bank governance.