central bank

Every country needs someone in charge of its money — someone to print the banknotes, keep the banking system from collapsing, and decide how cheap or dear borrowing should be. That institution is the central bank. It is not a normal bank where you keep your savings; it is a bank for banks and for the government. In the United States it is the Federal Reserve ('the Fed'); in the euro area, the European Central Bank; in China, the People's Bank of China; in Britain, the Bank of England.

A central bank does several jobs at once. It conducts monetary policy by setting the policy interest rate and managing the money supply. It is the 'lender of last resort,' standing ready to lend to banks in a panic so that one bank's trouble does not spread into a full bank run. It issues the nation's currency, supervises or helps regulate the banking system, and manages the country's foreign-exchange reserves. Crucially, it can create money — when it buys assets, it simply credits sellers' accounts with new money it conjures into existence, a power no ordinary bank has.

Because that money-creating power is so potent, modern central banks are usually given a clear mandate (most often keeping inflation low and stable) and a degree of independence from day-to-day politics, so they are not pressured to print money for short-term political gain. They are among the most powerful economic institutions in the world: a few words from a central bank chief can move trillions of dollars in markets. But they are not all-knowing — they work with delayed, imperfect data and can and do make mistakes.