Central banks are institutions responsible for conducting monetary policy, managing a country’s currency, and ensuring economic stability within each nation or region. Each central bank has a set of macroeconomic objectives such as price stability, financial stability, or economic growth, and they execute monetary policy in line with these goals.
Central banks play a key role as policy makers in economies. However, the spheres of influence of some central banks are broader than others.
Federal Reserve Bank
The Federal Reserve Bank (Fed) is the central bank and monetary authority of the United States and is known as the most influential central bank in the world. The Fed's influence stems from the international role of the U.S. dollar.
The Bank of International Settlements (BIS) describes the international role of the U.S. dollar as "unrivaled." According to BIS data, U.S. dollar transactions account for 88% of global foreign exchange transactions. Additionally, according to IMF data, about 60% of the world's foreign exchange reserves are in U.S. dollars, making it the primary reserve currency of the world.
When we look at world trade, although the U.S. only makes up one-tenth of global trade, approximately 50% of global trade invoicing is done in U.S. dollars. As seen, global markets prove the dependency on the U.S. dollar. The importance of the dollar also arises from the fact that the U.S. is the world's largest economy and that the dollar is the most liquid and accessible asset.
Given these factors, the Fed's policies affect many economies and national currencies on a global scale.
The U.S. has 12 geographical regions, each with a Reserve Bank headed by its own President. These 12 Federal Reserve Banks operate independently but under supervision. The Fed's policy-making bodies are the Federal Open Market Committee (FOMC) and the Board of Governors. The Board of Governors consists of seven members nominated by the President of the U.S. and confirmed by the U.S. Senate. The FOMC has a total of 12 members: seven from the Board of Governors, one being the President of the New York Fed, and the remaining four are rotating Presidents from the other Federal Reserve Banks, serving one-year terms.
The Fed executes three monetary policy tools: open market operations, the discount rate, and reserve requirements. The Board of Governors is responsible for the discount rate and reserve requirements, while the FOMC is responsible for open market operations. Jerome Powell currently serves as the Chairman of the Fed.
European Central Bank
The European Central Bank (ECB) is the central bank of the eurozone and manages the monetary policy for the entire region. The ECB is considered one of the world’s most influential central banks due to its management of the common currency for a large group of countries.
The euro is the second most important currency globally. According to BIS data, the euro accounts for a 31% share of global financial transactions, making it the second most used currency. Additionally, IMF data shows that about 20% of the world’s reserves are held in euros.
On the other hand, the European Union (EU) is the world’s second-largest economy as a union and is the largest trading partner for about 80 countries. ECB data indicates that approximately 58% of trade in goods and services outside the eurozone is invoiced in euros.
Therefore, the scope of ECB policies is broad, which is why it is mentioned as one of the most influential central banks.
The main policy-making body of the ECB is the Governing Council. The Council consists of the six members of the Executive Board and the governors of the central banks of the eurozone countries. The Governing Council is responsible for setting interest rates and conducting monetary policy.
Voting rights in the ECB Governing Council are based on a rotation system. The countries of the eurozone are grouped based on the size of their economies and financial sectors. The five largest countries share four voting rights, while the remaining countries rotate among the other 11 voting rights. Christine Lagarde currently serves as the President of the ECB.
Bank of Japan
The Bank of Japan (BOJ) is the central bank of Japan. The BOJ is responsible for implementing monetary policy, maintaining the stability of the Japanese financial system, and managing the currency and monetary control.
The Japanese Yen is the third most favored currency in financial transactions. According to BIS data, 17% of global financial transactions are conducted in Japanese Yen. Additionally, IMF data shows that about 6% of the world's reserves are held in Japanese Yen, making it the third-largest reserve asset globally.
Japan's economy is the third largest in the world and ranks fourth in total imports and exports. Therefore, Japan's foreign trade accounts for approximately 50% of its GDP. These aspects of the Japanese economy and the Japanese Yen make the BOJ one of the most influential central banks.
The highest decision-making body of the BOJ is the Policy Board. The Policy Board consists of 1 Governor, 2 Deputy Governors, and 6 policy board members. The members of the Policy Board are appointed by the Japanese Cabinet and confirmed by the Parliament. The current Governor of the BOJ is Kazuo Ueda.
Bank of England
The Bank of England (BoE) is the central bank of England and one of the first central banks to be established. The BoE's primary objectives are to maintain monetary and financial stability in England.
The British Pound Sterling is the fourth most used currency in global financial transactions, accounting for 13%. Looking at the global reserve stock, IMF data shows that about 5% of global reserves are held in British pounds.
The capital of England, London, is considered a global financial center. This makes England an attractive location for international investment and financial transactions. Additionally, England holds a significant position in world trade.
The decision-making body of the BoE is the Monetary Policy Committee (MPC). The MPC consists of 1 Governor, 3 Deputy Governors, 5 economists, and four external members directly appointed by the Chancellor. The current Governor of the BoE is Andrew Bailey.
People's Bank of China
The People's Bank of China (PBoC) is the central bank of the People's Republic of China and is responsible for conducting the country's monetary policy and ensuring price and financial stability. The PBoC holds the world's highest reserve with approximately 3 trillion USD in foreign exchange reserves.
The Chinese Renminbi is the fifth most used currency in global financial transactions. BIS data shows that 7% of global financial transactions are conducted in Renminbi.
China is the world's second-largest economy and largest exporter. China is the largest trading partner for eight of the world's top ten economies. These characteristics of the Chinese economy and the Renminbi make the PBoC one of the world's most influential policymakers.
The decision-making body of the PBoC is the Monetary Policy Committee (MPC), which consists of the chairman and 13 members. The MPC typically meets every three months and carries out processes aimed at the macroeconomic targets set by the government. The current Governor of the PBoC is Pan Gongsheng.
Conclusion
Central banks are one of the main policymakers for every economy. However, some central banks not only regulate their own national economies but also influence the global financial system. Therefore, understanding the policy orientations and economic forecasts of these central banks is critically important for tracking global economic trends and developing investment strategies.