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A central bank is an [https://volatility.red/Fundamental_Analysis#Institutional_vs._Retail_Traders institution] that is responsible for setting the monetary and interest rate policies for the country in which they reside.  This means that it’s the job of the central bank to make sure that the economy is stable and growing while the prosperity of its nation's citizens continues to strengthen.  This is no small task either because most major nations are rather large and have a lot of moving parts within their economy.   
A central bank is an [[Fundamental_Analysis#Institutional_vs._Retail_Traders | institution]] that is responsible for setting the monetary and [[Monetary_Policy_Tools#Interest_Rates | interest rate]] policies for the country in which they reside.  This means that it’s the job of the central bank to make sure that the economy is stable and growing while the prosperity of its nation's citizens continues to strengthen.  This is no small task either because most major nations are rather large and have a lot of moving parts within their economy.   


This Wiki is a part of our [[Essential Forex Trading Guide]]. Be sure to check that out [[Essential_Forex_Trading_Guide | HERE]].
This Wiki is a part of our [[Essential Forex Trading Guide]]. Be sure to check that out [[Essential_Forex_Trading_Guide | HERE]].
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='''Introduction to Central Banks'''=
='''Introduction to Central Banks'''=


All developed nations have their own central bank that is tasked with controlling the country’s monetary policies.  The monetary policy actions of the central bank will directly influence the [https://volatility.red/Price_Action_Analysis price movements] of the country’s [[currency]].  This is because they have full control over the available money supply and set the interest rates.  This makes them a big deal to the [[Forex]] market.   
All developed nations have their own central bank that is tasked with controlling the country’s [[Monetary_Policy_Tools | monetary policies]].  The [[Monetary_Policy_Tools | monetary policy]] actions of the central bank will directly influence the [[Price_Action_Analysis | price movements]] of the country’s [[currency]].  This is because they have full control over the available [[Money_Supply | money supply]] and set the [[Monetary_Policy_Tools#Interest_Rates | interest rates]].  This makes them a big deal to the [[Forex]] market.   


Control over interest rates, money supply, monetary policy, and much more is why central banks are so important to watch for all [[Forex]] traders.  Everything that they do will have a certain degree of impact on the [https://volatility.red/Price_Action_Analysis price] of their [[currency]], and therefore, will have an impact on the [https://volatility.red/Trading trading] decisions that [[Forex]] traders will take.   
Control over [[Monetary_Policy_Tools#Interest_Rates | interest rates]], [[Money_Supply | money supply]], [[Monetary_Policy_Tools | monetary policy]], and much more is why central banks are so important to watch for all [[Forex]] [[Trader_Types | traders]].  Everything that they do will have a certain degree of impact on the [[Price_Action_Analysis | price]] of their [[currency]], and therefore, will have an impact on the [[trading]] decisions that [[Forex]] [[Trader_Types | traders]] will take.   


There will be many times when the central banks will dictate how a trader will navigate [[Forex]] the market.  In fact, when central banks need to make decisive policy actions these are the times when it’s actually less risky and there are more pips to be made.  Even though it can be more volatile in these times it can make for very safe trades if a trader has an excellent understanding of the [https://volatility.red/Fundamental_Analysis fundamental] situation with central banks and the [[Forex]] market.  
There will be many times when the central banks will dictate how a trader will navigate [[Forex]] the market.  In fact, when central banks need to make decisive policy actions these are the times when it’s actually [[Sentiment_Analysis#Risk_On_and_Risk_Off | less risky]] and there are more [[Futures_Market#Ticks_and_Pips | pips]] to be made.  Even though it can be more volatile in these times it can make for very [[Safe_Haven_Flows | safe trades]] if a trader has an excellent understanding of the [[Fundamental_Analysis | fundamental]] situation with central banks and the [[Forex]] market.  


One of the things that a [[Forex]] trader needs to do is monitor what the central banks are doing and saying.  The process for monitoring central banks is quite simple.  But before a trader gets too bogged down worrying about all the policies and intricacies of the central banks, all they really need to understand is what the central banks are thinking or what is currently concerning them the most right now in real-time.  Traders typically do not need to concern themselves with things that the central banks themselves are not concerned with.  This makes the interpretation of a central bank a bit simpler.   
One of the things that a [[Forex]] trader needs to do is monitor what the central banks are doing and saying.  The [[Developing_your_Trading_Process | process for monitoring]] central banks is quite simple.  But before a trader gets too bogged down worrying about all the policies and intricacies of the central banks, all they really need to understand is what the central banks are thinking or what is currently concerning them the most right now in real-time.  [[Trader_Types | Traders]] typically do not need to concern themselves with things that the central banks themselves are not concerned with.  This makes the interpretation of a central bank a bit simpler.   


It’s important when a trader is analyzing a central bank to appreciate that there are only one or two things that they need to concern themselves with at any given time.  The things that [[Forex]] traders need to be concerned with are the exact same things that the central banks are saying they are concerned with.  Whatever they are concerned with is going to drive their decisions on how they are looking to enact their monetary policies to keep the economy stable and growing. As a consequence of this analysis, traders get insight into where interest rates may be headed in the near future.
It’s important when a trader is analyzing a central bank to appreciate that there are only one or two things that they need to concern themselves with at any given time.  The things that [[Forex]] [[Trader_Types | traders]] need to be concerned with are the exact same things that the central banks are saying they are concerned with.  Whatever they are concerned with is going to drive their decisions on how they are looking to enact their [[Monetary_Policy_Tools | monetary policies]] to keep the economy stable and growing. As a consequence of this [[Trading_Routine#Analysis_Phase | analysis]], [[Trader_Types | traders]] get insight into where [[Monetary_Policy_Tools#Interest_Rates | interest rates]] may be headed in the near future.




=='''Why Traders need to know what Central Banks are Thinking'''==
=='''Why Traders need to know what Central Banks are Thinking'''==


The reason traders need to know what a Central Bank is thinking is that if traders know how the central banks are thinking, what they are happy and unhappy with, then they can use that information to try and predict how the market will react to that information in the very near future.  This is because big [https://volatility.red/Fundamental_Analysis#Institutional_vs._Retail_Traders institutional players] are searching for these same clues because they too are trying to get in on developing [https://volatility.red/Price_Action_Analysis price] trends as early as possible.  It’s human nature to want to predict where the [https://volatility.red/Price_Action_Analysis price] of something is heading so that we can make the most money with the least [https://volatility.red/Risk risk] in the shortest amount of time possible.  This is the thought process of the big players and is the same process that retail traders want to be in tune with.   
The reason [[Trader_Types | traders]] need to know what a Central Bank is thinking is that if [[Trader_Types | traders]] know how the central banks are thinking, what they are happy and unhappy with, then they can use that information to try and predict how the market will react to that information in the very near future.  This is because big [[Fundamental_Analysis#Institutional_vs._Retail_Traders | institutional players]] are searching for these same clues because they too are trying to get in on developing [[Price_Action_Analysis | price]] [[Trends | trends]] as early as possible.  It’s human nature to want to predict where the [[Price_Action_Analysis | price]] of something is heading so that we can make the most money with the least [[risk]] in the shortest amount of time possible.  This is the thought process of the big players and is the same process that [[Institutional_and_Retail_Traders#What_is_a_Retail_Trader? | retail traders]] want to be in tune with.   


Since the actions that the central banks take will move the [https://volatility.red/Price_Action_Analysis price] of currencies, this can offer us some excellent [https://volatility.red/Trading trading] opportunities to trade around.  
Since the actions that the central banks take will move the [[Price_Action_Analysis | price]] of currencies, this can offer us some excellent [[trading]] opportunities to trade around.  




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* What are the central banks thinking?
* What are the central banks thinking?
* What is their next possible move on interest rates and why?   
* What is their next possible move on [[Monetary_Policy_Tools#Interest_Rates | interest rates]] and why?   
* How is their nation’s economy performing?   
* How is their nation’s economy performing?   
* What is the central bank concerned with?   
* What is the central bank concerned with?   
* What [https://www.youtube.com/watch?v=O2RIvJ1U7RE economic data] has the central bank stated they are watching closely?  (These will be the [https://www.youtube.com/watch?v=O2RIvJ1U7RE economic data] sets that traders want to monitor closely as well).
* What [[Economic_data_releases | economic data]] has the central bank stated they are watching closely?  (These will be the [[Economic_data_releases | economic data]] sets that [[Trader_Types | traders]] want to monitor closely as well).




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'''1870 - 1914'''
'''1870 - 1914'''


Between 1870 and 1914 the value of most major currencies was pegged to gold.  This meant that it was much easier to maintain a stable [[currency]] [https://volatility.red/Price_Action_Analysis price] than it is today when there is no [gold standard] in place.  This is because the amount of gold available in the world was limited so it wasn’t too difficult to keep [https://volatility.red/Fundamental_Analysis#Inflation_and_Deflation inflation] under control.  The [https://volatility.red/Price_Action_Analysis price] of gold was also historically quite stable at the time.   
Between 1870 and 1914 the [[Technical_Analysis#Fair_Value | value]] of most major currencies was pegged to gold.  This meant that it was much easier to maintain a stable [[currency]] [[Price_Action_Analysis | price]] than it is today when there is no [gold standard] in place.  This is because the amount of gold available in the world was limited so it wasn’t too difficult to keep [[Fundamental_Analysis#Inflation_and_Deflation | inflation]] under control.  The [[Price_Action_Analysis | price]] of gold was also historically quite stable at the time.   


During this time the main role of the central bank was to ensure that people were able to convert gold into [[currency]] and issue an appropriate number of bank notes based on the country’s reserve of gold.   
During this time the main role of the central bank was to ensure that people were able to convert gold into [[currency]] and issue an appropriate number of bank notes based on the country’s reserve of gold.   
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Then came along World War 1 and 2 which forced central banks all over the world to change course.  The financial toll associated with the cost of war became so large that governments needed to raise a lot of extra money and they needed to do it fast to keep up with all the cost pressures.  War is certainly not a cheap thing to do.   
Then came along World War 1 and 2 which forced central banks all over the world to change course.  The financial toll associated with the cost of war became so large that governments needed to raise a lot of extra money and they needed to do it fast to keep up with all the cost pressures.  War is certainly not a cheap thing to do.   


They raised this extra money by abandoning the [gold standard].  With this newfound power to do whatever they wanted governments started printing vast sums of money to pay for the extra costs of war and repairing all the damages that resulted from the fighting.  Doing this led to steep [https://volatility.red/Fundamental_Analysis#Inflation_and_Deflation inflation], which in many parts of the world became completely out of control.  [https://volatility.red/Fundamental_Analysis#Inflation_and_Deflation Inflation] went so high that it forced most governments to eventually return to the [[gold standard]].  
They raised this extra money by abandoning the [gold standard].  With this newfound power to do whatever they wanted governments started printing vast sums of money to pay for the extra costs of war and repairing all the damages that resulted from the fighting.  Doing this led to steep [[Fundamental_Analysis#Inflation_and_Deflation | inflation]], which in many parts of the world became completely out of control.  [[Fundamental_Analysis#Inflation_and_Deflation | Inflation]] went so high that it forced most governments to eventually return to the [[gold standard]].  


Because it was obvious that politicians with too much power over the supply of money is not good for the stability of their country’s [[currency]] the solution was to create completely independent central banks to guide monetary policy outside of politics.   
Because it was obvious that politicians with too much power over the supply of money is not good for the stability of their country’s [[currency]] the solution was to create completely independent central banks to guide [[Monetary_Policy_Tools | monetary policy]] outside of politics.   


Central banks have been around for hundreds of years but in their current status and design, they have only been around since about the mid-20th century.
Central banks have been around for hundreds of years but in their current status and design, they have only been around since about the mid-20th century.
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='''Central Banks and Interest Rates'''=
='''Central Banks and Interest Rates'''=


Before delving further into central banks it makes sense to understand a little about interest rates first.  Traditionally, [[Forex]] market traders have been heavily invested in understanding interest rates and interest rate policies.  It is consumed over what interest rates are for a particular nation and, more importantly, where they think interest rates are heading over the medium and long term outlook.  The '''expectations''' are one of the most important things the [[Forex]] market will attempt to [https://volatility.red/Price_Action_Analysis price] in and nowhere is this truer than when it comes to interest rates.   
Before delving further into central banks it makes sense to understand a little about [[Monetary_Policy_Tools#Interest_Rates | interest rates]] first.  Traditionally, [[Forex]] market [[Trader_Types | traders]] have been heavily invested in understanding [[Monetary_Policy_Tools#Interest_Rates | interest rates]] and [[Monetary_Policy_Tools#Interest_Rates | interest rate]] policies.  It is consumed over what [[Monetary_Policy_Tools#Interest_Rates | interest rates]] are for a particular nation and, more importantly, where they think [[Monetary_Policy_Tools#Interest_Rates | interest rates]] are heading over the medium and long term outlook.  The '''expectations''' are one of the most important things the [[Forex]] market will attempt to [[Price_Action_Analysis | price]] in and nowhere is this truer than when it comes to [[Monetary_Policy_Tools#Interest_Rates | interest rates]].   


The [[Forex]] market participants will aggressively try and [https://volatility.red/Price_Action_Analysis price] in their expectations of future interest rate policy virtually every day.  This is because there are so many [https://volatility.red/Trader_Scouting_and_Prop_Firms_Overview_and_Comparison asset management firms] that are heavily dependent on the interest paid for holding particular currencies in their portfolios.  These large [https://volatility.red/Trader_Scouting_and_Prop_Firms_Overview_and_Comparison asset management firms] rely heavily on guaranteed interest payments from central banks and government bonds.  Many of the largest [https://volatility.red/Trader_Scouting_and_Prop_Firms_Overview_and_Comparison asset management firms] in the world are heavily invested in multiple countries and therefore need to watch the particular currencies of the countries they are invested in quite closely.   
The [[Forex]] market [[Interbank_market#Participants_in_the_Interbank_Market | participants]] will aggressively try and [[Price_Action_Analysis | price]] in their [[Having_an_Edge_in_your_Trading#Unrealistic_Expectations | expectations]] of future [[Monetary_Policy_Tools#Interest_Rates | interest rate]] policy virtually every day.  This is because there are so many [[Trader_Scouting_and_Prop_Firms_Overview_and_Comparison | asset management firms]] that are heavily dependent on the interest paid for holding particular currencies in their portfolios.  These large [[Trader_Scouting_and_Prop_Firms_Overview_and_Comparison | asset management firms]] rely heavily on guaranteed interest payments from central banks and government [[Fundamental_Analysis#Bonds | bonds]].  Many of the largest [[Trader_Scouting_and_Prop_Firms_Overview_and_Comparison | asset management firms]] in the world are heavily invested in multiple countries and therefore need to watch the particular currencies of the countries they are invested in quite closely.   


If interest rates are rising in a particular nation then this is generally considered to be a positive thing for the native [[currency]] which tends to move higher in interest rate hiking [https://volatility.red/Fundamental_Analysis#Economic_Cycles cycles]. If interest rates are falling within a particular nation then this is typically a bad thing for the native [[currency]] and [https://volatility.red/Price_Action_Analysis prices] typically fall.   
If [[Monetary_Policy_Tools#Interest_Rates | interest rates]] are rising in a particular nation then this is generally considered to be a positive thing for the native [[currency]] which tends to move higher in [[Monetary_Policy_Tools#Interest_Rates | interest rate]] hiking [[Fundamental_Analysis#Economic_Cycles | cycles]]. If [[Monetary_Policy_Tools#Interest_Rates | interest rates]] are falling within a particular nation then this is typically a bad thing for the native [[currency]] and [[Price_Action_Analysis | prices]] typically fall.   


It’s the central bank of each nation that controls the interest rate for their respective nation.  If the [[Forex]] market is obsessed with interest rates and the path they are headed on, then it makes logical sense that [[Forex]] traders would want to get to know the central bank of the nation’s [[currency]] that they are interested in [https://volatility.red/Trading trading].   
It’s the central bank of each nation that controls the [[Monetary_Policy_Tools#Interest_Rates | interest rate]] for their respective nation.  If the [[Forex]] market is obsessed with [[Monetary_Policy_Tools#Interest_Rates | interest rates]] and the path they are headed on, then it makes logical sense that [[Forex]] [[Trader_Types | traders]] would want to get to know the central bank of the nation’s [[currency]] that they are interested in [[trading]].   


Because the central banks control interest rates this forces the [[Forex]] market participants to become laser focussed on what each individual central bank is talking about and doing in the market.  The market also pays very close attention to the individual central bank members as well.
Because the central banks control [[Monetary_Policy_Tools#Interest_Rates | interest rates]] this forces the [[Forex]] market [[Interbank_market#Participants_in_the_Interbank_Market | participants]] to become laser focussed on what each individual central bank is talking about and doing in the market.  The market also pays very close attention to the individual central bank members as well.




='''Overview of what Central Banks do'''=
='''Overview of what Central Banks do'''=


A central bank's main job is to control monetary policy for the country in which they serve.  Basically, they do this by manipulating the money supply.   
A central bank's main job is to control [[Monetary_Policy_Tools | monetary policy]] for the country in which they serve.  Basically, they do this by manipulating the [[Money_Supply | money supply]].   


'''Money Supply''':  This is simply the total amount of money that is available within the financial system of a particular nation.  It’s the amount of money currently in circulation within an economy.   
'''[[Money_Supply | Money Supply]]''':  This is simply the total amount of money that is available within the financial system of a particular nation.  It’s the amount of money currently in circulation within an economy.   


Central banks are generally considered to be the “lender of last resort”.  This means that when the economy is struggling and commercial banks cannot cover the demand for money the central bank has the power and the resources to step in and take an appropriate level of action.  In other words, the central bank is there to stop the banking system from collapsing in on itself.  They do this by manipulating the available money supply.   
Central banks are generally considered to be the “lender of last resort”.  This means that when the economy is struggling and commercial banks cannot cover the [[Sentiment_Analysis#Corporate_Demand | demand]] for money the central bank has the power and the resources to step in and take an appropriate level of action.  In other words, the central bank is there to stop the banking system from collapsing in on itself.  They do this by manipulating the available [[Money_Supply | money supply]].   


Most modern economies are very complex, and because of the lack of regulations, financial systems tend to get themselves into trouble about once every 10 years on average.  This is why central banks need to keep a close eye on developing trends in the economy to make sure that things don't get out of control, cause a financial system shock, or become unmanageable.   
Most modern economies are very complex, and because of the lack of regulations, financial systems tend to get themselves into trouble about once every 10 years on average.  This is why central banks need to keep a close eye on [[Trends | developing trends]] in the economy to make sure that things don't get out of control, cause a financial system shock, or become unmanageable.   


Aside from the primary objective of controlling the money supply, most central banks are also tasked with providing the country’s [[currency]] with [https://volatility.red/Price_Action_Analysis price] stability.  It also has regulatory authority over the country’s monetary policy along with the sole right to produce and circulate new [[currency]] inside the country.   
Aside from the primary objective of controlling the [[Money_Supply | money supply]], most central banks are also tasked with providing the country’s [[currency]] with [[Price_Action_Analysis | price]] stability.  It also has regulatory authority over the country’s [[Monetary_Policy_Tools | monetary policy]] along with the sole right to produce and circulate new [[currency]] inside the country.   


Central banks are separate from the governments of each nation.  The idea is that they should perform mostly autonomously from any political issues that may be going on inside the world of politics.  This is because politicians don’t have the greatest track record when it comes to managing money.  This is exactly why we have central banks.
Central banks are separate from the governments of each nation.  The idea is that they should perform mostly autonomously from any political issues that may be going on inside the world of politics.  This is because politicians don’t have the greatest track record when it comes to managing money.  This is exactly why we have central banks.


Having said that, the central bank is often referred to as ''“the government’s bank”'' in the sense that it’s the one that handles the buying and selling of government bonds and other similar transactions.
Having said that, the central bank is often referred to as ''“the government’s bank”'' in the sense that it’s the one that handles the buying and selling of government [[Fundamental_Analysis#Bonds | bonds]] and other similar transactions.




='''Monetary Policy and Money Supply'''=
='''Monetary Policy and Money Supply'''=


Before we deep into the tools that central banks use to enact monetary policy it would be useful if we first took a more in-depth look into what monetary policy actually is.   
Before we go deep into the [[Trading_Tools | tools]] that central banks use to enact [[Monetary_Policy_Tools | monetary policy]] it would be useful if we first took a more in-depth look into what [[Monetary_Policy_Tools | monetary policy]] actually is.   


Monetary policy consists of the actions that a central bank takes which determine the size and rate of growth of the available money supply.  This in turn will have an effect on interest rates because interest rates are one of the central bankers favorite monetary policy tools they use to help steer the economy.   
[[Monetary_Policy_Tools | Monetary policy]] consists of the actions that a central bank takes which determine the size and rate of growth of the available [[Money_Supply | money supply]].  This in turn will have an effect on [[Monetary_Policy_Tools#Interest_Rates | interest rates]] because [[Monetary_Policy_Tools#Interest_Rates | interest rates]] are one of the central bankers favorite [[Monetary_Policy_Tools | monetary policy tools]] they use to help steer the economy.   


Monetary policy is maintained through actions such as modifying the interest rate, buying or selling government bonds, and changing the amount of money banks are required to keep on hand for client withdrawals.   
[[Monetary_Policy_Tools | Monetary policy]]y is maintained through actions such as modifying the interest rate, buying or selling government [[Fundamental_Analysis#Bonds | bonds]], and changing the amount of money banks are required to keep on hand for client withdrawals.   


Broadly speaking there are two types of monetary policy; expansionary and contractionary.  This is what we will take a look at next.
Broadly speaking there are two types of [[Monetary_Policy_Tools | monetary policy]]; [[Economic_Cycles#1_Expansion | expansionary]] and contractionary.  This is what we will take a look at next.




=='''Expansionary Monetary Policy'''==
=='''Expansionary Monetary Policy'''==


Expansionary monetary policy attempts to “Increase” the money supply in order to lower unemployment, boost private-sector borrowing, encourage consumer spending, and stimulate overall [https://volatility.red/Fundamental_Analysis#Economic_Cycles economic growth].   
[[Economic_Cycles#1_Expansion | Expansionary]] [[Monetary_Policy_Tools | monetary policy]] attempts to “Increase” the [[Money_Supply | money supply]] in order to lower [[Economic_data_releases#Unemployment | unemployment]], boost private-sector borrowing, encourage [[Economic_data_releases#Consumer_and_Personal_Expenditure,_Private_Consumption | consumer spending]], and stimulate overall [[Fundamental_Analysis#Economic_Cycles | economic growth]].   


This is often referred to as "easy monetary policy."  This easy monetary policy description applied to almost all major central banks after the 2007-2008 Great Financial Crisis.  Almost all developed nations slashed their interest rates in an attempt to get their economies growing and expanding again.   
This is often referred to as "easy [[Monetary_Policy_Tools | monetary policy]]."  This easy [[Monetary_Policy_Tools | monetary policy]] description applied to almost all major central banks after the 2007-2008 Great Financial Crisis.  Almost all developed nations slashed their [[Monetary_Policy_Tools#Interest_Rates | interest rates]] in an attempt to get their economies growing and expanding again.   


Many economists have described this time as a modern-day depression.  Interest rates were driven way down and in many cases near zero across most G8 central banks.  In fact, some central banks set their interest rates below zero which means they had negative interest rates!  This is not something that the world has ever seen before and we are not totally sure what the long-term ramifications are for such untraditional actions just yet.   
Many economists have described this time as a modern-day depression.  [[Monetary_Policy_Tools#Interest_Rates | Interest rates]] were driven way down and in many cases near zero across most G8 central banks.  In fact, some central banks set their [[Monetary_Policy_Tools#Interest_Rates | interest rates]] below zero which means they had negative [[Monetary_Policy_Tools#Interest_Rates | interest rates]]!  This is not something that the world has ever seen before and we are not totally sure what the long-term ramifications are for such untraditional actions just yet.   


Can you imagine putting your money into a bank and having them tell you that they are going to charge you interest for the privilege of holding onto your cash?  But this is exactly what happened and is currently still happening.   
Can you imagine putting your money into a bank and having them tell you that they are going to charge you interest for the privilege of holding onto your cash?  But this is exactly what happened and is currently still happening.   
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=='''Contractionary Monetary Policy'''==
=='''Contractionary Monetary Policy'''==


Contractionary monetary policy attempts “Decrease” or slow the rate of growth in the money supply.  Sometimes a central bank will need to outright decrease the money supply in order to control [https://volatility.red/Fundamental_Analysis#Inflation_and_Deflation inflation] that is growing at a rate higher than the central bank's mandate.   
Contractionary [[Monetary_Policy_Tools | monetary policy]] attempts “Decrease” or slow the rate of growth in the [[Money_Supply | money supply]].  Sometimes a central bank will need to outright decrease the [[Money_Supply | money supply]] in order to control [[Fundamental_Analysis#Inflation_and_Deflation | inflation]] that is growing at a rate higher than the central bank's mandate.   


Historically speaking, this has sometimes been a necessary option for a central bank.  There are times when contractionary monetary policy is needed to slow [https://volatility.red/Fundamental_Analysis#Economic_Cycles economic growth], increase unemployment and depress borrowing and spending by consumers and businesses.  It is just not sustainable to think an economy can grow infinitely at large growth rates.  This is only done in a situation where [https://volatility.red/Fundamental_Analysis#Inflation_and_Deflation inflation] is getting way too high and needs to be controlled.   
Historically speaking, this has sometimes been a necessary option for a central bank.  There are times when contractionary [[Monetary_Policy_Tools | monetary policy]] is needed to slow [[Fundamental_Analysis#Economic_Cycles | economic growth]], increase [[Economic_data_releases#Unemployment | unemployment]] and depress borrowing and spending by [[Economic_data_releases#Consumer_and_Personal_Expenditure,_Private_Consumption | consumers]] and businesses.  It is just not sustainable to think an economy can grow infinitely at large growth rates.  This is only done in a situation where [[Fundamental_Analysis#Inflation_and_Deflation | inflation]] is getting way too high and needs to be controlled.   


The point here is that central banks are trying to keep [https://volatility.red/Fundamental_Analysis#Inflation_and_Deflation inflation] stable and in line with their mandate.  This is typically around 2% per year.  If [https://volatility.red/Fundamental_Analysis#Inflation_and_Deflation inflation] starts to get too low then they will have an expansionary monetary policy and will use the tools they have to stimulate [https://volatility.red/Fundamental_Analysis#Inflation_and_Deflation inflation].  If [https://volatility.red/Fundamental_Analysis#Inflation_and_Deflation inflation] starts to get too high then the central bank will switch to a contractionary monetary policy.  The whole point is to control [https://volatility.red/Fundamental_Analysis#Economic_Cycles boom and bust cycles] by keeping [https://volatility.red/Sentiment_Analysis#Volatility volatility] within the economy low.   
The point here is that central banks are trying to keep [[Fundamental_Analysis#Inflation_and_Deflation | inflation]] stable and in line with their mandate.  This is typically around 2% per year.  If [[Fundamental_Analysis#Inflation_and_Deflation | inflation]] starts to get too low then they will have an expansionary [[Monetary_Policy_Tools | monetary policy]] and will use the [[Trading_Tools | tools]] they have to stimulate [[Fundamental_Analysis#Inflation_and_Deflation | inflation]].  If [[Fundamental_Analysis#Inflation_and_Deflation | inflation]] starts to get too high then the central bank will switch to a contractionary [[Monetary_Policy_Tools | monetary policy]].  The whole point is to control [[Fundamental_Analysis#Economic_Cycles | boom and bust cycles]] by keeping [[Sentiment_Analysis#Volatility | volatility]] within the economy low.   




=='''When Contractionary Monetary Policy Goes Wrong'''==
=='''When Contractionary Monetary Policy Goes Wrong'''==


Monetary policy is not perfect all the time.  It really is quite a difficult balancing act to steer economies that are so large and have so many moving parts.  Let’s look at a quick example of when contractionary monetary policy goes so wrong for a couple of obvious reasons.   
[[Monetary_Policy_Tools | Monetary policy]] is not perfect all the time.  It really is quite a difficult balancing act to steer economies that are so large and have so many moving parts.  Let’s look at a quick example of when contractionary [[Monetary_Policy_Tools | monetary policy]] goes so wrong for a couple of obvious reasons.   


In the early 1980s, the Federal Reserve was forced into a situation where they had no choice but to stage an intervention.  The Fed really dropped the ball and allowed [https://volatility.red/Fundamental_Analysis#Inflation_and_Deflation inflation] to get completely out of control which now reached roughly 15% annually.  Do you think this was a little out of line with their mandate of keeping [https://volatility.red/Fundamental_Analysis#Inflation_and_Deflation inflation] levels stable at around 2%?  It’s not like [https://volatility.red/Fundamental_Analysis#Inflation_and_Deflation inflation] went up to 15% overnight, it was years in the making.
In the early 1980s, the [[Federal_Reserve | Federal Reserve]] was forced into a situation where they had no choice but to stage an intervention.  The Fed really dropped the ball and allowed [[Fundamental_Analysis#Inflation_and_Deflation | inflation]] to get completely out of control which now reached roughly 15% annually.  Do you think this was a little out of line with their mandate of keeping [[Fundamental_Analysis#Inflation_and_Deflation | inflation]] levels stable at around 2%?  It’s not like [[Fundamental_Analysis#Inflation_and_Deflation | inflation]] went up to 15% overnight, it was years in the making.


This out-of-control [https://volatility.red/Fundamental_Analysis#Inflation_and_Deflation inflation] forced the Fed to take decisive action.  In a historical event, they chose to raise the benchmark interest rate to 20%! This hike resulted in a severe recession.  However, it did keep the out-of-control [https://volatility.red/Fundamental_Analysis#Inflation_and_Deflation inflation] in check by unfortunately causing harm to many everyday people and companies. There was simply no way for regular people to prepare for that level of interest rate shock.
This out-of-control [[Fundamental_Analysis#Inflation_and_Deflation | inflation]] forced the Fed to take decisive action.  In a historical event, they chose to raise the benchmark [[Monetary_Policy_Tools#Interest_Rates | interest rate]] to 20%! This hike resulted in a severe [[Economic_Cycles#3_Recession | recession]].  However, it did keep the out-of-control [[Fundamental_Analysis#Inflation_and_Deflation | inflation]] in check by unfortunately causing harm to many everyday people and companies. There was simply no way for regular people to prepare for that level of [[Monetary_Policy_Tools#Interest_Rates | interest rate]] shock.


It's obvious that [https://volatility.red/Fundamental_Analysis#Inflation_and_Deflation inflation] got so out of control because the Fed waited way too long to start slowing down the economy.  Had the Fed reacted years earlier it could have kept with one of its mandates to keep [https://volatility.red/Price_Action_Analysis price] stability under control. This is considered one of the few times that a major central bank failed miserably to meet its mandates to the economy.   
It's obvious that [[Fundamental_Analysis#Inflation_and_Deflation | inflation]] got so out of control because the Fed waited way too long to start slowing down the economy.  Had the Fed reacted years earlier it could have kept with one of its mandates to keep [[Price_Action_Analysis | price]] stability under control. This is considered one of the few times that a major central bank failed miserably to meet its mandates to the economy.   




=='''Exchange Rates'''==
=='''Exchange Rates'''==


[https://volatility.red/Exchange_rates Exchange rates], or the pricing of [[currency]], are generally moved by forces outside of the control of central banks.  But this is not always the case because sometimes central banks will step into the market and attempt to influence the pricing of [https://volatility.red/Exchange_rates exchange rates].   
[[Exchange_rates | Exchange rates]], or the pricing of [[currency]], are generally moved by forces outside of the control of central banks.  But this is not always the case because sometimes central banks will step into the market and attempt to influence the pricing of [[Exchange_rates | exchange rates]].   


We have a larger Wiki on [[Exchange rates]] that covers everything you need to know including [https://volatility.red/Exchange_rates#What_is_an_Exchange_Rate? What an Exchange Rate is], [https://volatility.red/Exchange_rates#Exchange_Rate_Examples Exchange Rate Examples], [https://volatility.red/Exchange_rates#The_Technical_Aspects_of_Exchange_Rates The Technical Aspects of Exchange Rates], How Exchange Rates are priced and [https://volatility.red/Exchange_rates#Exchange_Rate_Pricing_Theories Exchange Rate Pricing Theories].
We have a larger Wiki on [[Exchange rates]] that covers everything you need to know including [[Exchange_rates#What_is_an_Exchange_Rate? | What an Exchange Rate is]], [[Exchange_rates#Exchange_Rate_Examples | Exchange Rate Examples]], [[Exchange_rates#The_Technical_Aspects_of_Exchange_Rates | The Technical Aspects of Exchange Rates]], How Exchange Rates are priced and [[Exchange_rates#Exchange_Rate_Pricing_Theories | Exchange Rate Pricing Theories]].


The main page for [[Exchange rates]] is found here: [[Exchange rates]]
The main page for [[Exchange rates]] is found here: [[Exchange rates]]
Line 142: Line 142:
=='''Money Supply'''==
=='''Money Supply'''==


The money supply is just that; it’s the available supply of money that is circulating within an economy and globally of one particular [[currency]].  The central bank of each nation is tasked with controlling their country’s supply of money.  The money supply is sometimes referred to as the “Money Stock”.   
The [[Money_Supply | money supply]] is just that; it’s the available supply of money that is circulating within an economy and globally of one particular [[currency]].  The central bank of each nation is tasked with controlling their country’s supply of money.  The [[Money_Supply | money supply]] is sometimes referred to as the “Money Stock”.   


The central bank of each nation manipulates the money supply.  They will increase or decrease the money supply depending on what their current monetary policies are.  They do this by using a series of tools that can be employed in different market environments.  A lot of this depends on where they believe they are in the [https://volatility.red/Fundamental_Analysis#Economic_Cycles economic cycle].
The central bank of each nation manipulates the [[Money_Supply | money supply]].  They will increase or decrease the [[Money_Supply | money supply]] depending on what their current [[Monetary_Policy_Tools | monetary policies]] are.  They do this by using a series of [[Trading_Tools | tools]] that can be employed in different market environments.  A lot of this depends on where they [[Trading_psychology#13._Beliefs,_Attitudes,_and_Perceptions | believe]] they are in the [[Fundamental_Analysis#Economic_Cycles | economic cycle]].


There are several tools that central banks can use to enact their monetary policies.  In the next section, we will take an in-depth look at what tools the central banks have and how they use these tools to move the economy in the direction they desire.   
There are several [[Trading_Tools | tools]] that central banks can use to enact their [[Monetary_Policy_Tools | monetary policies]].  In the next section, we will take an in-depth look at what [[Trading_Tools | tools]] the central banks have and how they use these [[Trading_Tools | tools]] to move the economy in the direction they desire.   




='''Central Bank [[Monetary Policy Tools]]'''=
='''Central Bank [[Monetary Policy Tools]]'''=


Central banks are major monetary authorities that attempt to control the size and growth of money in several ways using [[Monetary Policy Tools]]. In the following Wiki on [[Monetary Policy Tools]] we will cover the types and kinds of tools that Central Banks use to control and steer the economy in their desired direction. We will look at:
Central banks are major monetary authorities that attempt to control the size and growth of money in several ways using [[Monetary Policy Tools]]. In the following Wiki on [[Monetary Policy Tools]] we will cover the [[Trader_Types | types]] and kinds of [[Trading_Tools | tools]] that Central Banks use to control and steer the economy in their desired direction. We will look at:


* [https://volatility.red/Monetary_Policy_Tools#Interest_Rates Interest Rates]
* [[Monetary_Policy_Tools#Interest_Rates | Interest Rates]]
* [https://volatility.red/Monetary_Policy_Tools#Price_Controls Price Controls]
* [[Monetary_Policy_Tools#Price_Controls | Price Controls]]
* [https://volatility.red/Monetary_Policy_Tools#Reserve_Requirements Reserve Requirements]
* [[Monetary_Policy_Tools#Reserve_Requirements | Reserve Requirements]]
* [https://volatility.red/Monetary_Policy_Tools#Credit_Control Credit Control]
* [[Monetary_Policy_Tools#Credit_Control | Credit Control]]
* [https://volatility.red/Monetary_Policy_Tools#Central_Banker_Language Central Banker Language]
* [[Monetary_Policy_Tools#Central_Banker_Language | Central Banker Language]]
* [https://volatility.red/Monetary_Policy_Tools#Moral_Suasion Moral Suasion]
* [[Monetary_Policy_Tools#Moral_Suasion | Moral Suasion]]
* [https://volatility.red/Monetary_Policy_Tools#Open_Market_Operations Open Market Operations]
* [[Monetary_Policy_Tools#Open_Market_Operations | Open Market Operations]]
* [https://volatility.red/Monetary_Policy_Tools#Quantitative_Easing Quantitative Easing]
* [[Monetary_Policy_Tools#Quantitative_Easing | Quantitative Easing]]


The main Wiki on [[Monetary Policy Tools]] can be found [https://volatility.red/Monetary_Policy_Tools HERE].
The main Wiki on [[Monetary Policy Tools]] can be found [[Monetary_Policy_Tools | HERE]].




='''[[Hawks and Doves]]'''=
='''[[Hawks and Doves]]'''=


Now we are going to look at the individual central bank members' stances.  That’s right, not all central bankers within a particular central bank will want the same thing when it comes to monetary policies.  This means that some may prefer to have higher interest rates and other members will prefer lower interest rates and they are called [[Hawks and Doves]].  The differences in those opinions are what we discuss in the following Wiki on [[Hawks and Doves]].
Now we are going to look at the individual [[Sentiment_Analysis#Central_Bank_Member_Stance | central bank members' stances]].  That’s right, not all central bankers within a particular central bank will want the same thing when it comes to [[Monetary_Policy_Tools | monetary policies]].  This means that some may prefer to have higher [[Monetary_Policy_Tools#Interest_Rates | interest rates]] and other members will prefer lower [[Monetary_Policy_Tools#Interest_Rates | interest rates]] and they are called [[Hawks and Doves]].  The differences in those opinions are what we discuss in the following Wiki on [[Hawks and Doves]].


In this Wiki on [[Hawks and Doves]] you will learn the differences between a [https://volatility.red/Hawks_and_Doves#Hawks Hawk], a [https://volatility.red/Hawks_and_Doves#Doves Dove] and a [https://volatility.red/Hawks_and_Doves#What_is_a_Centrist_(Neutral)? Centrist]. We will also explore [https://volatility.red/Hawks_and_Doves#Central_Bank_Member_Speeches Central Bank Member Speeches], [https://volatility.red/Hawks_and_Doves#Central_Bankers_are_Not_Created_Equal Why not all Central Bankers are Created Equal], and why we as traders [https://volatility.red/Hawks_and_Doves#Why_Traders_Care_about_Hawks_and_Doves Care about Hawks and Doves].
In this Wiki on [[Hawks and Doves]] you will learn the differences between a [[Hawks_and_Doves#Hawks | Hawk]], a [[Hawks_and_Doves#Doves | Dove]] and a [[Hawks_and_Doves#What_is_a_Centrist_(Neutral)? | Centrist]]. We will also explore [[Hawks_and_Doves#Central_Bank_Member_Speeches | Central Bank Member Speeches]], [[Hawks_and_Doves#Central_Bankers_are_Not_Created_Equal | Why not all Central Bankers are Created Equal]], and why we as [[Trader_Types | traders]] [[Hawks_and_Doves#Why_Traders_Care_about_Hawks_and_Doves | Care about Hawks and Doves]].


You can access the Wiki on [[Hawks and Doves]] [https://volatility.red/Hawks_and_Doves HERE].
You can access the Wiki on [[Hawks and Doves]] [[Hawks_and_Doves | HERE]].




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=='''USA – [[Federal Reserve]] (Fed)'''==
=='''USA – [[Federal Reserve]] (Fed)'''==


The [[Federal Reserve]] is by far the most influential central bank in the world at the time of this writing in mid-2022.  Its [[currency]] is involved in an estimated 70% of all FX transactions that take place every single day.  Because of this, the actions that the Fed takes can have a strong impact on most of the world’s [[currency]] valuations.  This is because the USD is one-half of most all major currency pairs.   
The [[Federal Reserve]] is by far the most influential central bank in the world at the time of this writing in mid-2022.  Its [[currency]] is involved in an estimated 70% of all FX transactions that take place every single day.  Because of this, the actions that the Fed takes can have a strong impact on most of the world’s [[currency]] valuations.  This is because the USD is one-half of most all major [[currency]] pairs.   


For these reasons and more, we have created a separate Wiki devoted to understanding the [[Federal Reserve]]. In this Wiki, you will learn about the [https://volatility.red/Federal_Reserve#Fed_Structure Fed Structure], [https://volatility.red/Federal_Reserve#Fed_Mandate its Mandate], [https://volatility.red/Federal_Reserve#Fed_Minutes Fed Minutes], [https://volatility.red/Federal_Reserve#Forward_Guidance Forward Guidance], and [https://volatility.red/Federal_Reserve#What_Does_the_Fed_do_and_How_do_they_do_it? How the Fed Enacts its Monetary Policies].
For these reasons and more, we have created a separate Wiki devoted to understanding the [[Federal Reserve]]. In this Wiki, you will learn about the [[Federal_Reserve#Fed_Structure | Fed Structure]], [[Federal_Reserve#Fed_Mandate | its Mandate]], [[Federal_Reserve#Fed_Minutes | Fed Minutes]], [[Federal_Reserve#Forward_Guidance | Forward Guidance]], and [[Federal_Reserve#What_Does_the_Fed_do_and_How_do_they_do_it? | How the Fed Enacts its Monetary Policies]].


The main Wiki for the [[Federal Reserve]] can be found [https://volatility.red/Federal_Reserve HERE].
The main Wiki for the [[Federal Reserve]] can be found [[Federal_Reserve | HERE]].




=='''Europe – [[European Central Bank]] (ECB)'''==
=='''Europe – [[European Central Bank]] (ECB)'''==


The European Central Bank (ECB) is the prime component of the Eurosystem and the European System of Central Banks (ESCB). It is also one of seven institutions of the European Union. At the time of this writing the ECB is one of the most important central banks in the world.
The [[European_Central_Bank | European Central Bank]] (ECB) is the prime component of the Eurosystem and the European System of Central Banks (ESCB). It is also one of seven institutions of the European Union. At the time of this writing the ECB is one of the most important central banks in the world.


In this Wiki we will explore the [https://volatility.red/European_Central_Bank#ECB_Structure ECB structure], [https://volatility.red/European_Central_Bank#ECB_Provides_Forward_guidance Forward guidance], the [https://volatility.red/European_Central_Bank#ECB_Meetings ECB meetings], [https://volatility.red/European_Central_Bank#The_ECB%E2%80%99s_Mandate their mandate] and more.  
In this Wiki we will explore the [[European_Central_Bank#ECB_Structure | ECB structure]], [[European_Central_Bank#ECB_Provides_Forward_guidance | Forward guidance]], the [[European_Central_Bank#ECB_Meetings | ECB meetings]], [https://volatility.red/European_Central_Bank#The_ECB%E2%80%99s_Mandate their mandate] and more.  


The main Wiki for the [[European Central Bank]] can be found [https://volatility.red/European_Central_Bank HERE].
The main Wiki for the [[European Central Bank]] can be found [[European_Central_Bank | HERE]].




=='''United Kingdom – [[The Bank of England]] (BOE)'''==
=='''United Kingdom – [[The Bank of England]] (BOE)'''==


The Bank of England (BOE) is the central bank of the United Kingdom and the model on which most modern central banks have been based. The BOE was established in 1694 to act as the English Government's banker, and is still one of the bankers for the Government of the United Kingdom.
[[The_Bank_of_England | The Bank of England ]](BOE) is the central bank of the United Kingdom and the model on which most modern central banks have been based. The BOE was established in 1694 to act as the English Government's banker, and is still one of the bankers for the Government of the United Kingdom.


In this Wiki we will take a look at the Bank of England's [https://volatility.red/The_Bank_of_England#BOE_Structure Structure], [https://volatility.red/The_Bank_of_England#BOE_Mandate Mandate] and more.
In this Wiki we will take a look at the [[The_Bank_of_England | Bank of England's]] [[The_Bank_of_England#BOE_Structure | Structure]], [[The_Bank_of_England#BOE_Mandate | Mandate]] and more.


The main Wiki for the [[The Bank of England]] can be found [https://volatility.red/The_Bank_of_England HERE].
The main Wiki for the [[The Bank of England]] can be found [[The_Bank_of_England | HERE]].




=='''Japan – [[The Bank of Japan]] (BOJ)'''==
=='''Japan – [[The Bank of Japan]] (BOJ)'''==


The Bank of Japan (BOJ) is headquartered in the Nihonbashi business district in Tokyo. The BOJ is the Japanese central bank, which is responsible for issuing and handling currency and treasury securities, implementing monetary policy, maintaining the stability of the Japanese financial system, and providing settling and clearing services.  
[[The_Bank_of_Japan | The Bank of Japan (BOJ)]] is headquartered in the Nihonbashi business district in [[Forex_Trading_Sessions#Asia_Pacific_Session | Tokyo]]. The [[The_Bank_of_Japan | BOJ]] is the [[The_Bank_of_Japan | Japanese central bank]], which is responsible for issuing and handling [[currency]] and treasury securities, implementing [[Monetary_Policy_Tools | monetary policy]], maintaining the stability of the Japanese financial system, and providing settling and [[Futures_Market#Clearing | clearing services]].  


In this Wiki we will look at the BOJ structure, BOJ jawboning, their mandate and more.
In this Wiki we will look at the BOJ structure, BOJ jawboning, their mandate and more.


The main Wiki for the [[The Bank of Japan]] can be found [https://volatility.red/The_Bank_of_Japan HERE].
The main Wiki for the [[The Bank of Japan]] can be found [[The_Bank_of_Japan | HERE]].




=='''Switzerland – [[Swiss National Bank]] (SNB)'''==
=='''Switzerland – [[Swiss National Bank]] (SNB)'''==


The term Swiss National Bank (SNB) refers to the central bank of Switzerland. Founded in 1906, the SNB is located in Berne and Zurich, with six other offices in the country along with a branch office in Singapore. The central bank acts as an independent body, taking charge of the country's monetary policy and ensuring national price stability.  
The term [[Swiss_National_Bank | Swiss National Bank (SNB)]] refers to the central bank of Switzerland. Founded in 1906, the SNB is located in Berne and Zurich, with six other offices in the country along with a branch office in Singapore. The central bank acts as an independent body, taking charge of the country's [[Monetary_Policy_Tools | monetary policy]] and ensuring national price stability.  


In this Wiki we will cover the [https://volatility.red/Swiss_National_Bank#SNB_Structure SNB structure], [https://volatility.red/Swiss_National_Bank#SNB_Monetary_Policy Monetary Policy], [https://volatility.red/Swiss_National_Bank#Switzerland_and_Exports Export Policies] and more.
In this Wiki we will cover the [[Swiss_National_Bank#SNB_Structure | SNB structure]], [[Swiss_National_Bank#SNB_Monetary_Policy | Monetary Policy]], [[Swiss_National_Bank#Switzerland_and_Exports | Export Policies]] and more.


The main Wiki for the [[Swiss National Bank]] can be found [https://volatility.red/Swiss_National_Bank HERE].
The main Wiki for the [[Swiss National Bank]] can be found [[Swiss_National_Bank | HERE]].




=='''Canada – [[The Bank of Canada]] (BOC)'''==
=='''Canada – [[The Bank of Canada]] (BOC)'''==


The Bank of Canada (BOC) is Canada's central bank and was established in 1934 under the Bank of Canada Act. The Act stated that the Bank of Canada was created “to promote the economic and financial welfare of Canada.” The BOC and its Governor are responsible for setting monetary policies, printing money, and determining the Canadian banks' interest rates.
[[The_Bank_of_Canada | The Bank of Canada (BOC)]] is [[The_Bank_of_Canada | Canada's central bank]] and was established in 1934 under the [[The_Bank_of_Canada | Bank of Canada]] Act. The Act stated that the [[The_Bank_of_Canada | Bank of Canada]] was created “to promote the [[Economic_data_releases | economic]] and financial welfare of Canada.” The BOC and its Governor are responsible for setting [[Monetary_Policy_Tools | monetary policies]], printing money, and determining the Canadian banks' [[Monetary_Policy_Tools#Interest_Rates | interest rates]].


In this Wiki, we will explore the Bank of Canada, its [https://volatility.red/The_Bank_of_Canada#BOC_Structure structure], [https://volatility.red/The_Bank_of_Canada#BOC_Monetary_Policy_Mandates monetary policy] and more.
In this Wiki, we will explore the [[The_Bank_of_Canada | Bank of Canada]], its [[The_Bank_of_Canada#BOC_Structure | structure]], [[The_Bank_of_Canada#BOC_Monetary_Policy_Mandates | monetary policy]] and more.


The main Wiki for the [[The Bank of Canada]] can be found [https://volatility.red/The_Bank_of_Canada HERE].
The main Wiki for the [[The Bank of Canada]] can be found [[The_Bank_of_Canada | HERE]].




=='''Australia – [[The Reserve Bank of Australia]] (RBA)'''==
=='''Australia – [[The Reserve Bank of Australia]] (RBA)'''==


The Reserve Bank of Australia (RBA) is the central bank of Australia. The bank sets the country's monetary policy and issues and manages the Australian dollar. The RBA is involved in banking and registry services for federal agencies and some international central banks. The bank is owned entirely by the Australian government and was established in 1960.
[[The_Reserve_Bank_of_Australia | The Reserve Bank of Australia (RBA)]] is the [[The_Reserve_Bank_of_Australia | central bank of Australia]]. The bank sets the country's [[Monetary_Policy_Tools | monetary policy]] and issues and manages the Australian dollar. The RBA is involved in banking and registry services for federal agencies and some international central banks. The bank is owned entirely by the Australian government and was established in 1960.


In this Wiki, we will explore the RBA, its structure, mandates and more.
In this Wiki, we will explore the RBA, its structure, mandates and more.


The main Wiki for the [[The Reserve Bank of Australia]] can be found [https://volatility.red/The_Reserve_Bank_of_Australia HERE].
The main Wiki for the [[The Reserve Bank of Australia]] can be found [[The_Reserve_Bank_of_Australia | HERE]].




=='''New Zealand – [[The Reserve Bank of New Zealand]] (RBNZ)'''==
=='''New Zealand – [[The Reserve Bank of New Zealand]] (RBNZ)'''==


The Reserve Bank of New Zealand (RBNZ) is the name of the central bank of New Zealand. Its primary purpose is to maintain the stability of New Zealand's financial system.
[[The Reserve Bank of New Zealand]] (RBNZ) is the name of the central bank of New Zealand. Its primary purpose is to maintain the stability of New Zealand's financial system.


In this Wiki, We will explore The Reserve Bank of New Zealand, its [https://volatility.red/The_Reserve_Bank_of_New_Zealand#RBNZ_Structure structure], [https://volatility.red/The_Reserve_Bank_of_New_Zealand#RBNZ_Mandate mandates] and more.
In this Wiki, We will explore [[The Reserve Bank of New Zealand]], its [[The_Reserve_Bank_of_New_Zealand#RBNZ_Structure | structure]], [[The_Reserve_Bank_of_New_Zealand#RBNZ_Mandate | mandates]] and more.


The main Wiki for the [[The Reserve Bank of New Zealand]] can be found [https://volatility.red/The_Reserve_Bank_of_New_Zealand HERE].
The main Wiki for the [[The Reserve Bank of New Zealand]] can be found [[The_Reserve_Bank_of_New_Zealand | HERE]].




=='''Other Central Banks'''==
=='''Other Central Banks'''==


There are of course other central banks that you can trade around but the ones presented here are the major ones that will present traders with the majority of their [https://volatility.red/Trading trading] opportunities.  Once you get comfortable with how to analyze a central bank you then might want to check out some of the Scandinavian central banks or Mexico as their currencies are liquid enough to trade and are increasing in popularity with [https://volatility.red/Forex_broker brokers] and retail traders.
There are of course other central banks that you can trade around but the ones presented here are the major ones that will present [[Trader_Types | traders]] with the majority of their [[trading]] opportunities.  Once you get comfortable with how to analyze a central bank you then might want to check out some of the Scandinavian central banks or Mexico as their currencies are liquid enough to trade and are increasing in popularity with [[Forex_broker | brokers]] and [[Institutional_and_Retail_Traders#What_is_a_Retail_Trader? | retail traders]].
 
==Related Wikis==
 
Readers of '''Central Banks''' also viewed:
 
* [[Monetary Policy Tools]]
* [[Economic data releases]]
* [[Developing your Trading Process]]
* [[Trading Routine]]
* [[Retail Forex Scams]]

Latest revision as of 16:29, 17 October 2023

A central bank is an institution that is responsible for setting the monetary and interest rate policies for the country in which they reside. This means that it’s the job of the central bank to make sure that the economy is stable and growing while the prosperity of its nation's citizens continues to strengthen. This is no small task either because most major nations are rather large and have a lot of moving parts within their economy.

This Wiki is a part of our Essential Forex Trading Guide. Be sure to check that out HERE.



Introduction to Central Banks

All developed nations have their own central bank that is tasked with controlling the country’s monetary policies. The monetary policy actions of the central bank will directly influence the price movements of the country’s currency. This is because they have full control over the available money supply and set the interest rates. This makes them a big deal to the Forex market.

Control over interest rates, money supply, monetary policy, and much more is why central banks are so important to watch for all Forex traders. Everything that they do will have a certain degree of impact on the price of their currency, and therefore, will have an impact on the trading decisions that Forex traders will take.

There will be many times when the central banks will dictate how a trader will navigate Forex the market. In fact, when central banks need to make decisive policy actions these are the times when it’s actually less risky and there are more pips to be made. Even though it can be more volatile in these times it can make for very safe trades if a trader has an excellent understanding of the fundamental situation with central banks and the Forex market.

One of the things that a Forex trader needs to do is monitor what the central banks are doing and saying. The process for monitoring central banks is quite simple. But before a trader gets too bogged down worrying about all the policies and intricacies of the central banks, all they really need to understand is what the central banks are thinking or what is currently concerning them the most right now in real-time. Traders typically do not need to concern themselves with things that the central banks themselves are not concerned with. This makes the interpretation of a central bank a bit simpler.

It’s important when a trader is analyzing a central bank to appreciate that there are only one or two things that they need to concern themselves with at any given time. The things that Forex traders need to be concerned with are the exact same things that the central banks are saying they are concerned with. Whatever they are concerned with is going to drive their decisions on how they are looking to enact their monetary policies to keep the economy stable and growing. As a consequence of this analysis, traders get insight into where interest rates may be headed in the near future.


Why Traders need to know what Central Banks are Thinking

The reason traders need to know what a Central Bank is thinking is that if traders know how the central banks are thinking, what they are happy and unhappy with, then they can use that information to try and predict how the market will react to that information in the very near future. This is because big institutional players are searching for these same clues because they too are trying to get in on developing price trends as early as possible. It’s human nature to want to predict where the price of something is heading so that we can make the most money with the least risk in the shortest amount of time possible. This is the thought process of the big players and is the same process that retail traders want to be in tune with.

Since the actions that the central banks take will move the price of currencies, this can offer us some excellent trading opportunities to trade around.


Questions to Ask about Central Banks

  • What are the central banks thinking?
  • What is their next possible move on interest rates and why?
  • How is their nation’s economy performing?
  • What is the central bank concerned with?
  • What economic data has the central bank stated they are watching closely? (These will be the economic data sets that traders want to monitor closely as well).


A Brief History of Central Banks

Let’s take a quick look at central bank history for some context on how the modern financial system got to where it is today.


1870 - 1914

Between 1870 and 1914 the value of most major currencies was pegged to gold. This meant that it was much easier to maintain a stable currency price than it is today when there is no [gold standard] in place. This is because the amount of gold available in the world was limited so it wasn’t too difficult to keep inflation under control. The price of gold was also historically quite stable at the time.

During this time the main role of the central bank was to ensure that people were able to convert gold into currency and issue an appropriate number of bank notes based on the country’s reserve of gold.


World War 1 and 2

Then came along World War 1 and 2 which forced central banks all over the world to change course. The financial toll associated with the cost of war became so large that governments needed to raise a lot of extra money and they needed to do it fast to keep up with all the cost pressures. War is certainly not a cheap thing to do.

They raised this extra money by abandoning the [gold standard]. With this newfound power to do whatever they wanted governments started printing vast sums of money to pay for the extra costs of war and repairing all the damages that resulted from the fighting. Doing this led to steep inflation, which in many parts of the world became completely out of control. Inflation went so high that it forced most governments to eventually return to the gold standard.

Because it was obvious that politicians with too much power over the supply of money is not good for the stability of their country’s currency the solution was to create completely independent central banks to guide monetary policy outside of politics.

Central banks have been around for hundreds of years but in their current status and design, they have only been around since about the mid-20th century.


Central Banks and Interest Rates

Before delving further into central banks it makes sense to understand a little about interest rates first. Traditionally, Forex market traders have been heavily invested in understanding interest rates and interest rate policies. It is consumed over what interest rates are for a particular nation and, more importantly, where they think interest rates are heading over the medium and long term outlook. The expectations are one of the most important things the Forex market will attempt to price in and nowhere is this truer than when it comes to interest rates.

The Forex market participants will aggressively try and price in their expectations of future interest rate policy virtually every day. This is because there are so many asset management firms that are heavily dependent on the interest paid for holding particular currencies in their portfolios. These large asset management firms rely heavily on guaranteed interest payments from central banks and government bonds. Many of the largest asset management firms in the world are heavily invested in multiple countries and therefore need to watch the particular currencies of the countries they are invested in quite closely.

If interest rates are rising in a particular nation then this is generally considered to be a positive thing for the native currency which tends to move higher in interest rate hiking cycles. If interest rates are falling within a particular nation then this is typically a bad thing for the native currency and prices typically fall.

It’s the central bank of each nation that controls the interest rate for their respective nation. If the Forex market is obsessed with interest rates and the path they are headed on, then it makes logical sense that Forex traders would want to get to know the central bank of the nation’s currency that they are interested in trading.

Because the central banks control interest rates this forces the Forex market participants to become laser focussed on what each individual central bank is talking about and doing in the market. The market also pays very close attention to the individual central bank members as well.


Overview of what Central Banks do

A central bank's main job is to control monetary policy for the country in which they serve. Basically, they do this by manipulating the money supply.

Money Supply: This is simply the total amount of money that is available within the financial system of a particular nation. It’s the amount of money currently in circulation within an economy.

Central banks are generally considered to be the “lender of last resort”. This means that when the economy is struggling and commercial banks cannot cover the demand for money the central bank has the power and the resources to step in and take an appropriate level of action. In other words, the central bank is there to stop the banking system from collapsing in on itself. They do this by manipulating the available money supply.

Most modern economies are very complex, and because of the lack of regulations, financial systems tend to get themselves into trouble about once every 10 years on average. This is why central banks need to keep a close eye on developing trends in the economy to make sure that things don't get out of control, cause a financial system shock, or become unmanageable.

Aside from the primary objective of controlling the money supply, most central banks are also tasked with providing the country’s currency with price stability. It also has regulatory authority over the country’s monetary policy along with the sole right to produce and circulate new currency inside the country.

Central banks are separate from the governments of each nation. The idea is that they should perform mostly autonomously from any political issues that may be going on inside the world of politics. This is because politicians don’t have the greatest track record when it comes to managing money. This is exactly why we have central banks.

Having said that, the central bank is often referred to as “the government’s bank” in the sense that it’s the one that handles the buying and selling of government bonds and other similar transactions.


Monetary Policy and Money Supply

Before we go deep into the tools that central banks use to enact monetary policy it would be useful if we first took a more in-depth look into what monetary policy actually is.

Monetary policy consists of the actions that a central bank takes which determine the size and rate of growth of the available money supply. This in turn will have an effect on interest rates because interest rates are one of the central bankers favorite monetary policy tools they use to help steer the economy.

Monetary policyy is maintained through actions such as modifying the interest rate, buying or selling government bonds, and changing the amount of money banks are required to keep on hand for client withdrawals.

Broadly speaking there are two types of monetary policy; expansionary and contractionary. This is what we will take a look at next.


Expansionary Monetary Policy

Expansionary monetary policy attempts to “Increase” the money supply in order to lower unemployment, boost private-sector borrowing, encourage consumer spending, and stimulate overall economic growth.

This is often referred to as "easy monetary policy." This easy monetary policy description applied to almost all major central banks after the 2007-2008 Great Financial Crisis. Almost all developed nations slashed their interest rates in an attempt to get their economies growing and expanding again.

Many economists have described this time as a modern-day depression. Interest rates were driven way down and in many cases near zero across most G8 central banks. In fact, some central banks set their interest rates below zero which means they had negative interest rates! This is not something that the world has ever seen before and we are not totally sure what the long-term ramifications are for such untraditional actions just yet.

Can you imagine putting your money into a bank and having them tell you that they are going to charge you interest for the privilege of holding onto your cash? But this is exactly what happened and is currently still happening.


Contractionary Monetary Policy

Contractionary monetary policy attempts “Decrease” or slow the rate of growth in the money supply. Sometimes a central bank will need to outright decrease the money supply in order to control inflation that is growing at a rate higher than the central bank's mandate.

Historically speaking, this has sometimes been a necessary option for a central bank. There are times when contractionary monetary policy is needed to slow economic growth, increase unemployment and depress borrowing and spending by consumers and businesses. It is just not sustainable to think an economy can grow infinitely at large growth rates. This is only done in a situation where inflation is getting way too high and needs to be controlled.

The point here is that central banks are trying to keep inflation stable and in line with their mandate. This is typically around 2% per year. If inflation starts to get too low then they will have an expansionary monetary policy and will use the tools they have to stimulate inflation. If inflation starts to get too high then the central bank will switch to a contractionary monetary policy. The whole point is to control boom and bust cycles by keeping volatility within the economy low.


When Contractionary Monetary Policy Goes Wrong

Monetary policy is not perfect all the time. It really is quite a difficult balancing act to steer economies that are so large and have so many moving parts. Let’s look at a quick example of when contractionary monetary policy goes so wrong for a couple of obvious reasons.

In the early 1980s, the Federal Reserve was forced into a situation where they had no choice but to stage an intervention. The Fed really dropped the ball and allowed inflation to get completely out of control which now reached roughly 15% annually. Do you think this was a little out of line with their mandate of keeping inflation levels stable at around 2%? It’s not like inflation went up to 15% overnight, it was years in the making.

This out-of-control inflation forced the Fed to take decisive action. In a historical event, they chose to raise the benchmark interest rate to 20%! This hike resulted in a severe recession. However, it did keep the out-of-control inflation in check by unfortunately causing harm to many everyday people and companies. There was simply no way for regular people to prepare for that level of interest rate shock.

It's obvious that inflation got so out of control because the Fed waited way too long to start slowing down the economy. Had the Fed reacted years earlier it could have kept with one of its mandates to keep price stability under control. This is considered one of the few times that a major central bank failed miserably to meet its mandates to the economy.


Exchange Rates

Exchange rates, or the pricing of currency, are generally moved by forces outside of the control of central banks. But this is not always the case because sometimes central banks will step into the market and attempt to influence the pricing of exchange rates.

We have a larger Wiki on Exchange rates that covers everything you need to know including What an Exchange Rate is, Exchange Rate Examples, The Technical Aspects of Exchange Rates, How Exchange Rates are priced and Exchange Rate Pricing Theories.

The main page for Exchange rates is found here: Exchange rates


Money Supply

The money supply is just that; it’s the available supply of money that is circulating within an economy and globally of one particular currency. The central bank of each nation is tasked with controlling their country’s supply of money. The money supply is sometimes referred to as the “Money Stock”.

The central bank of each nation manipulates the money supply. They will increase or decrease the money supply depending on what their current monetary policies are. They do this by using a series of tools that can be employed in different market environments. A lot of this depends on where they believe they are in the economic cycle.

There are several tools that central banks can use to enact their monetary policies. In the next section, we will take an in-depth look at what tools the central banks have and how they use these tools to move the economy in the direction they desire.


Central Bank Monetary Policy Tools

Central banks are major monetary authorities that attempt to control the size and growth of money in several ways using Monetary Policy Tools. In the following Wiki on Monetary Policy Tools we will cover the types and kinds of tools that Central Banks use to control and steer the economy in their desired direction. We will look at:

The main Wiki on Monetary Policy Tools can be found HERE.


Hawks and Doves

Now we are going to look at the individual central bank members' stances. That’s right, not all central bankers within a particular central bank will want the same thing when it comes to monetary policies. This means that some may prefer to have higher interest rates and other members will prefer lower interest rates and they are called Hawks and Doves. The differences in those opinions are what we discuss in the following Wiki on Hawks and Doves.

In this Wiki on Hawks and Doves you will learn the differences between a Hawk, a Dove and a Centrist. We will also explore Central Bank Member Speeches, Why not all Central Bankers are Created Equal, and why we as traders Care about Hawks and Doves.

You can access the Wiki on Hawks and Doves HERE.


Major Central Banks

USA – Federal Reserve (Fed)

The Federal Reserve is by far the most influential central bank in the world at the time of this writing in mid-2022. Its currency is involved in an estimated 70% of all FX transactions that take place every single day. Because of this, the actions that the Fed takes can have a strong impact on most of the world’s currency valuations. This is because the USD is one-half of most all major currency pairs.

For these reasons and more, we have created a separate Wiki devoted to understanding the Federal Reserve. In this Wiki, you will learn about the Fed Structure, its Mandate, Fed Minutes, Forward Guidance, and How the Fed Enacts its Monetary Policies.

The main Wiki for the Federal Reserve can be found HERE.


Europe – European Central Bank (ECB)

The European Central Bank (ECB) is the prime component of the Eurosystem and the European System of Central Banks (ESCB). It is also one of seven institutions of the European Union. At the time of this writing the ECB is one of the most important central banks in the world.

In this Wiki we will explore the ECB structure, Forward guidance, the ECB meetings, their mandate and more.

The main Wiki for the European Central Bank can be found HERE.


United Kingdom – The Bank of England (BOE)

The Bank of England (BOE) is the central bank of the United Kingdom and the model on which most modern central banks have been based. The BOE was established in 1694 to act as the English Government's banker, and is still one of the bankers for the Government of the United Kingdom.

In this Wiki we will take a look at the Bank of England's Structure, Mandate and more.

The main Wiki for the The Bank of England can be found HERE.


Japan – The Bank of Japan (BOJ)

The Bank of Japan (BOJ) is headquartered in the Nihonbashi business district in Tokyo. The BOJ is the Japanese central bank, which is responsible for issuing and handling currency and treasury securities, implementing monetary policy, maintaining the stability of the Japanese financial system, and providing settling and clearing services.

In this Wiki we will look at the BOJ structure, BOJ jawboning, their mandate and more.

The main Wiki for the The Bank of Japan can be found HERE.


Switzerland – Swiss National Bank (SNB)

The term Swiss National Bank (SNB) refers to the central bank of Switzerland. Founded in 1906, the SNB is located in Berne and Zurich, with six other offices in the country along with a branch office in Singapore. The central bank acts as an independent body, taking charge of the country's monetary policy and ensuring national price stability.

In this Wiki we will cover the SNB structure, Monetary Policy, Export Policies and more.

The main Wiki for the Swiss National Bank can be found HERE.


Canada – The Bank of Canada (BOC)

The Bank of Canada (BOC) is Canada's central bank and was established in 1934 under the Bank of Canada Act. The Act stated that the Bank of Canada was created “to promote the economic and financial welfare of Canada.” The BOC and its Governor are responsible for setting monetary policies, printing money, and determining the Canadian banks' interest rates.

In this Wiki, we will explore the Bank of Canada, its structure, monetary policy and more.

The main Wiki for the The Bank of Canada can be found HERE.


Australia – The Reserve Bank of Australia (RBA)

The Reserve Bank of Australia (RBA) is the central bank of Australia. The bank sets the country's monetary policy and issues and manages the Australian dollar. The RBA is involved in banking and registry services for federal agencies and some international central banks. The bank is owned entirely by the Australian government and was established in 1960.

In this Wiki, we will explore the RBA, its structure, mandates and more.

The main Wiki for the The Reserve Bank of Australia can be found HERE.


New Zealand – The Reserve Bank of New Zealand (RBNZ)

The Reserve Bank of New Zealand (RBNZ) is the name of the central bank of New Zealand. Its primary purpose is to maintain the stability of New Zealand's financial system.

In this Wiki, We will explore The Reserve Bank of New Zealand, its structure, mandates and more.

The main Wiki for the The Reserve Bank of New Zealand can be found HERE.


Other Central Banks

There are of course other central banks that you can trade around but the ones presented here are the major ones that will present traders with the majority of their trading opportunities. Once you get comfortable with how to analyze a central bank you then might want to check out some of the Scandinavian central banks or Mexico as their currencies are liquid enough to trade and are increasing in popularity with brokers and retail traders.

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