Macroeconomics 101: Central Banks & Interest Rates.
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What is covered in this chapter
The Engine of Exchange Rates
Interest rates are the single most powerful driver of currency values in the global financial markets. Central banks—such as the Federal Reserve (Fed), the Bank of England (BoE), and the European Central Bank (ECB)—manipulate interest rates to control inflation and stabilize economic growth.
The Mandate of Central Banks
Central banks operate under a dual mandate: stable prices (controlling inflation, usually targeted at 2%) and maximum sustainable employment. Their policy tools include:
- Interest Rate Policy: Adjusting lending rates to expand or contract economic borrowing.
- Quantitative Easing/Tightening (QE/QT): Buying or selling government debt to inject or drain liquidity from the banking system.
- Forward Guidance: Using speeches and reports to prepare the market for future policy adjustments.
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