What central banks actually do

A central bank is the institution that controls a country's money. It is the single most important actor in macro, because it sets the price of money — the interest rate — that every other price is built on.

The core mandate

Most central banks share a primary job: price stability, meaning keeping inflation low and predictable (commonly a target near 2% in developed economies). Some, like the US Federal Reserve, also have a mandate for maximum employment. This is the famous "dual mandate."

The main tool: the policy interest rate

The central bank sets a benchmark rate that ripples through the whole economy:

• Raising rates (tightening) makes borrowing more expensive, cools demand, fights inflation — and tends to strengthen the currency by raising the return on holding it.
• Cutting rates (easing) makes borrowing cheaper, stimulates growth — and tends to weaken the currency.

Why every word matters

Markets do not just react to the decision; they react to the expectation of future decisions. A central bank that signals future hikes can move the currency immediately even without changing rates today. This is why traders parse every statement, press conference and set of projections — the guidance often matters more than the action.

The next lessons take the four banks most relevant to this platform's markets — the Fed, Brazil's BCB, the ECB and the Bank of Japan — one at a time.