What is Central Bank?
A central bank is a national institution that manages a country's currency, money supply, and interest rates to ensure monetary stability.
The primary mandate of most central banks, like the US Federal Reserve (the Fed) or the Bank of England, is to achieve price stability—typically defined as low and stable inflation. They act as a 'lender of last resort' to the banking system and often oversee financial stability. They do not deal directly with the public but with commercial banks and the government.
A central bank's most powerful tool is monetary policy, primarily implemented by setting a key policy interest rate (like the Fed Funds Rate). Raising rates can cool an overheating economy and curb inflation, while cutting rates can stimulate borrowing, spending, and investment to combat a recession.