Markets can see who’s calling shots on US rates, and it’s not the Fed

Central bankers are sometimes known as the high priests of finance. That is because they control high-powered money, commonly known as the monetary base, or the sum of currency in circulation plus commercial bank deposits with them. By buying government bonds from banks or the market, which expands central bank balance sheets, the commercial banks’ reserves rise, improving market liquidity and therefore reducing short-term interest rates.

In effect, central banks affect market sentiment by expanding their balance sheets, which is also known as quantitative easing. Buying long-term bonds lowers their yields while increased liquidity lowers short-term rates, thus changing the whole interest rate curve. Interest rates rise when central banks tighten liquidity, affecting asset prices and having an effect on the real economy by influencing economic growth and jobs.

Central banks seek to implement monetary policy to maintain price and financial stability. Today, this is seen as a professional and technical job requiring autonomy of operations, if not policy independence.