4 central banks dominating world economy
Central banks play an integral role in today's market economies by maintaining the stability and credibility of the national currencies used in those economies.
While a stable currency is important for achieving price stability conducive to stable economic growth within the domestic economy, it's also important in achieving stable exchange rates with common international trading partners. Volatile exchange rates with common trading partners mean unstable prices for imports and exports creating a vacillating economic environment in this increasingly globalized economy.
As the US dollar, euro, Japanese yen, and British pound are the four most commonly used currencies in global payments, the monetary policies of their respective issuers (i.e., central banks) are most important for maintaining international economic stability.
Below are the "Big Four" central banks and their respective stances on monetary policy. The Federal Open Market Committee ( FOMC) is responsible for devising U.S. monetary policy, which, according to Federal Reserve documents, is mandated to be "promoting maximum employment, stable prices, and moderate long-term interest rates." The 12 members of the FOMC meet a minimum of eight times a year in order to determine the most appropriate level for the federal funds rate, the overnight interest rate at which depository institutions lend to each other.
Through the use of a set of monetary tools, the FOMC can affect the federal funds rate, which then affects other interest rates and, consequently, other economic variables, including price level and unemployment. Currently, the FOMC sees a 2% inflation rate as the most consistent with its statutory mandate and long-run normal rate of unemployment between the range of 5.2% and 5.5%. The European Central Bank (ECB) is responsible for the monetary policy of the 19 European Union countries that use the euro. Comprised of six executive board members and the governors of the 19 central banks of the euro-area nations, its proclaimed mandate is maintaining price stability and safeguarding the euro's value.
Meeting twice a month, this governing council analyzes and assesses recent economic developments to determine the appropriate level for key interest rates. The appropriate level of these interest rates is crucial for maintaining the ECB's mission of price stability and maintenance of the euro's purchasing power, which is currently seen as being achieved at a medium- term inflation rate below - but close to - 2%.
The monetary policy committee (MPC) of the Bank of England (BoE) is responsible for the nation's monetary policy, currently recognized as the maintenance of price stability and confidence in the currency. Traditionally, the BoE achieved its monetary objectives through the interest rate, but in March 2009, it claimed it would begin directly injecting money into the economy through quantitative easing or the direct purchasing of financial assets.
The nine-member committee meets monthly to assess the economic climate and vote on the appropriate level for Bank Rate - the interest rate the BoE pays on reserve balances - as well as on any quantitative easing measures to be taken. Through these tools, the MPC looks to maintain price stability, currently defined as achieved at an inflation rate of 2%.British pound usage: GBP used for 7.92% of global payments as of December 2014.
Japan's monetary policy is decided by the policy board whose stated mandate is the maintenance of price stability, which constitutes "the foundation for the nation's economic activity." Money market operations are the primary tool used by the Bank of Japan (BoJ). They're how the BOJ controls the amount of funds available in the money market, which consequently affects interest rates within the economy.
Meeting once or twice a month at Monetary Policy Meetings (MPMs), the board discusses the current economic and financial climate and then determines an appropriate guideline for its money market operations. The board's inflation target (at which it sees the achievement of price stability) is currently set at 2%. Japanese yen usage: JPY used for 2.69% of global payments as of December 2014. (See also How Central Banks Control The Supply of Money.)
Unstable prices make consumption and investment decisions by individuals and firms extremely difficult because many of these decisions are based on expectations about future prices. No wonder one of the primary monetary policy objectives common to the Big Four central banks is price stability. One of the essential characteristics of money is that it acts as a stable store of value; any instability in this store-ofvalue quality of the above currencies could lead to its decreasing use and, consequently, declining influence in the global economy. Want to learn How to Invest In Commodities? Investopedia's FREE Commodities Trading newsletter gives you the insights you need to profit from natural resources. Click here to begin tracking the commodity market like an expert today.