Central banks conduct monetary policy by adjusting the money supply, usually by buying or selling securities in the open market. Open market operations affect short-term interest rates, which in turn affect longer-term rates and economic activity. When central banks lower interest rates, monetary policy becomes accommodative. Central banks play a crucial role in achieving financial and economic stability. The financial policy followed by these banks is an essential part of their tools and powers. This is the financial policy of central banks and their role in achieving economic goals:
- Controlling interest rates: Controlling interest rates is considered one of the most important financial policy tools used by central banks. Interest rates are adjusted with the aim of controlling inflation and promoting economic growth. If central banks want to stimulate economic growth, they may lower interest rates to encourage investment and borrowing. On the other hand, if there is a risk of hyperinflation
- Liquidity policies: Central banks aim to ensure the availability of liquidity in the financial system. These banks use liquidity policies to ensure that commercial banks and other financial institutions are able to meet their financial needs. This includes providing loans to commercial banks and providing implicit liquidity to meet any potential crises in the financial market.
- Regulatory and supervisory policies: Central banks play an important role in setting regulatory and supervisory policies for the banking sector. These policies aim to ensure stability and security in the financial system and protect the rights of financial consumers. This includes setting capital requirements for banks, implementing monitoring and review procedures
- Supporting economic growth: Central banks work to support economic growth through their financial policies. These banks provide the necessary financing and support to vital sectors of the economy, such as industry, trade and investment
The policy of central banks in achieving financial and economic stability
The fiscal policy of central banks plays a crucial role in achieving financial and economic stability. This policy helps control interest rates, ensure adequate availability of liquidity, enforce laws and regulations, and support economic growth. Through these tools and powers, central banks enhance confidence in the financial system and promote economic stability. In order to make topic simpler, we will discuss some of the financial tools used by most important central bank in the world, which is US Federal Reserve, which is considered the most important financial institutions in the United States.
The Federal Reserve has a set of financial tools that are used to regulate the financial system and achieve economic stability. Let us get to know some of these tools:
- Discount interest: Discount interest is one of Federal Bank’s tools. Commercial banks are required to maintain a certain level of deposits at the Federal Reserve. If banks are in urgent need of cash, they can request loans from the Federal Reserve at discount rates. The discount rate is higher than general interest rates and is used to control the level of liquidity and encourage cash reserves for commercial banks.
- Market operations: Market operations involve the buying and selling of securities (such as government bonds) by the Federal Bank. Market operations are used to adjust the level of liquidity in the financial system and achieve desired monetary objectives. For example, if there is a shortage of liquidity, the Fed can buy securities to provide banks with needed cash, and conversely, if there is an excess of liquidity,
- Foreign exchange market: The Federal Bank has the authority to intervene in the foreign exchange market. The Federal Reserve can buy or sell foreign currencies to adjust the value of the US dollar and achieve monetary stability.
The policy of central banks and the Federal Bank
The Fed uses these tools proactively and cautiously to maintain financial system stability and promote economic growth. In short, the US Federal Reserve’s fiscal policy plays a crucial role in promoting monetary and economic stability. The Federal Reserve relies on its powers and financial tools to regulate interest rates, manage liquidity and cash, monitor commercial banks, and support economic stability. The Federal Reserve uses these tools proactively and cautiously to maintain the stability of the financial system and promote economic growth.
The end of the monetary tightening cycle in the United States of America: The world is awaiting the course of monetary policy in the United States of America, as reports continue that include future expectations for that policy, especially with economic data that show the success of the monetary policy followed by the Federal Reserve Bank in controlling inflation rates, reducing demand, and controlling… Relative to the strong labor market.
The US dollar declined strongly last November, while recovering some of its previous losses during the current month, as it maintained a strong performance, especially after the employment data in the US non-agricultural sector, which is issued during the first Friday of every calendar month. The US jobs report showed increases greater than expected. These surprising numbers contributed to the rise of the dollar,
The non-farm payrolls numbers were an inconsistent tone with the series of positive data released since the beginning of last October, as numbers showed the economic slowdown in the United States of America. Which prompted market analysts to recalibrate their previous expectations, which were highly optimistic about federal interest rate cuts early next year. Most of these estimates centered around the start of the shift in monetary policy by the end of the first quarter of 2024.
Central bank policy: Expectations of interest cuts in the United States of America
Expectations of interest cuts in the United States of America during 2024 In the broader context, the November jobs report, despite being considered a small setback for the Federal Reserve, is likely to support, as well as the consumer price index data, which came in line with expectations, declining by 0.1 percent, as inflation reached… During November to 3.1 percent. Fully captures the current range of interest rate cut expectations priced into the US interest rate market.
The impact of changing the course of monetary policy in the United States: In the end, it is important to know the course of monetary policy in the United States of America, which had an impact on the global economy. This was clearly evident with the beginning of monetary policy tightening at the beginning of the second quarter of 2022, which caused a wave of withdrawal of foreign reserves from most central banks and the bond market in emerging markets. For example, the Egyptian government suffered a significant decline in foreign exchange reserves over the course of 2022 following the exit of approximately $20 billion from the Egyptian market following the start of interest hikes in the United States.
The importance of determining the course of monetary policy is of particular importance to some central banks. For example, central banks in the Arab Gulf countries follow the monetary policy approved by the Federal Reserve Bank, in their effort to normalize monetary policy amid those countries’ keenness to stabilize the value of their currency against the dollar.
What does monetary policy affect: This policy helps reduce unemployment rates and stimulate business activities and consumer spending. The overall goal of this policy is to support economic growth, but it can also have a negative effect, sometimes leading to hyperinflation.
